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Full text of "The principles of economics, with applications to practical problems"

UNIVERSITY OF CALIFORNIA 
AT LOS ANGELES 




/'T 



THE PRINCIPLES OF 
ECONOMICS 

WITH APPLICATIONS TO 
PRA ICAL PROBLEMP 



FRANK A. FETTER, PH. D. 

PROFESSOR OF ECONOMICS PRINCETON UNIVERSITY 
(formerly OF CORNELL UNIVERSITY) 



Third Edition, partly revised with new Bibliographies and Exercises 




:.C'\ 



1 



NEW YORK 
THE CENTURY CO. 

luia 



'^ ^ ^ S G 7 



Copyright, 1904, by 
The Centurt Co. 



First printed. September. 1904 

Reprinted, September, 1905 

Reprinted, September. 1907 

Second Edition, 1910 

Third Edition, 1911 

Reprinted, June, 1913 



I e • « ■ ' 



1883 






^^3 



TO THE STUDENTS 
OF THREE UNIVERSITIES 

INDIANA, STANFORD, AND CORNELL 

FOR WHOM, WITH WHOM, AND BY WHOSE AID 
THIS BOOK CAME TO BE WRITTEN 



CONTENTS 

PART I 

PAGE 

The Value of Material Things 1-169 

DIVISION A— WANTS AND PRESENT GOODS 

CHAPTER 

1 The Nature and Purpose op Political Economy 

Name and definition — Place of Economies among the 
Social Sciences — The relation of Economics to prac- 
tical affairs 3 

2 Economic Motives 

Material wants, the primary economic motives — Desires 
for non-material ends, as secondary economic motives 9 

3 Wealth and Welfare 

The relation of men and material things to economic 
welfare — Some important economic concepts connected 
with wealth and welfare 15 

4 The Nature of Demand 

The comparison of goods in man's thought — Demand 
for goods grows out of subjective comparisons ... 21 

5 Exchange in a Market 

Exchange of goods resulting from demand — Barter \m- 
der simple conditions — Price in a market .... 30 

6 Psychic Income 

Income as a flow of goods — Income as a series of grat- 
ifications 39 

DIVISION B— WEALTH AND RENT 

7 Wealth and Its Direct Uses 

The grades of relation of indirect goods to gratification 

— Conditions of economic wealth 46 

vii 



viii CONTENTS 

CHAPTER PAGE 

8 The Renting Contract 

Nature and definition of rent — The history of contract 
rent and changes in it 53 

9 The Law of Diminishing Returns 

Definition of the concept of (economic) diminishing 
returns — Other meanings of the phrase "diminishing 
returns" — Development of the concept of diminishing 
returns 61 

10 The Theory op Rent 

The market value of the usufruct: Differential ad- 
vantages in consumption goods — Differential advan- 
tages in indirect goods 73 

11 Repair, Depreciation, and Destruction op 

Wealth 

Relation to its sale and rent: Repair of rent-bearing 
agents — Depreciation in rent-bearing power of agents 
kept in repair — ^Destruction of natural stores of ma- 
terials 81 

12 Increase of Rent-bearers and of Rents 

Efforts of men to increase products and rent-bearers — 
Effects of social changes in raising the rents of indirect 
agents 90 

DIVISION C— CAPITALIZATION AND TIME-VALUE 

13 Money as a Tool in Exchange 

Origin of the use of money — Nature of the use of 
money — The value of typical money 98 

14 The Money Economy and the Concept op 

Capital 

The barter economy and its decline — The concept of 
capital in modern business 108 

15 The Capitalization of All Forms of Rent 

The purchase of rent-charges as an example of capitali- 
zation — Capitalization involved in the evaluating of 
indirect agents — The increasing role of capitalization 
in modern industry 118 

16 Interest on Money Loans 

Various forms of contract interest — The motive for 
paying interest 131 



CONTENTS ix 

CHAPT^B PAGE 

17 The Theory of Time-value 

Definition and scope of time-valne — The adjustment of 
the rate of time-discount 141 

18 Relatively Fixed and Relatively Increasable 

Forms of Wealth 

How various forms of wealth may be increased — Social 
significance of these differences 152 

19 Saving and Production as Affected by the 

Rate of Interest 

Saving as affected by the interest rate — Conditions 
favorable to saving — Influence of the interest rate on 
methods of production 159 



PART II 
The Value of Human Services .... 171-355 

DIVISION A— LABOR AND WAGES 

20 Labor and Classes of Laborers 

Relation of labor to wealth — Varieties of talents and 

of abilities in men 173 

21 The Supply of Labor 

What is a doctrine of population ? Population in human 
society — Current aspect of the population problem . 184 

22 Conditions for Efficient Labor 

Objective physical conditions — Social conditions favor- 
ing efficiency — Division of labor 195 

23 The Law of Wages 

Nature of wages and the wages problem — The different 
modes of earning wages — Wages as exemplifying the 
general law of value 205 

24 The Relation of Labor to Value 

Relation of rent to wages — Relation of time-value to 
wages — The relation of labor to value 215 

25 The Wage System and its Results 

Systems of labor — The wage system as it is — Progress 

of the masses under the wage system 226 



"^ 



X CONTENTS 

CHAPTEB ^-^^^ 

26 Machinery and Labor 

Extent of the use of machinery — Effect of machinery 

on the welfare and wages of the masses 236 

27 Trade-unions 

The objects of trade-unions— The methods of trade- 
unions — Combination and wages 245 

DIVISION B— ENTERPRISE AND PROFITS 

28 Production and the Combination of the Fac- 

tors 

The nature of production — Combination of the factors 257 

29 Business Organization and the Enterpriser's 

Function 

The direction of industry — Qualities of a business or- 
/ ganizer — The selection of ability 265 

30 Cost op Production 

Cost of production from the enterpriser's point of view 

— Cost of production from the economist's standpoint . 273 

31 The Law of Profits 

Meaning of terms — The typical enterpriser's service 
reviewed — Statement of the law of profits .... 282 

32 Profit-sharing, Producers' and Consumers' 

Cooperation 

Profit-sharing — Producers' cooperation — Consumers' co- 
operation 292 

33 Monopoly Profits 

Nature of monopoly — Kinds of monopoly — The fixing 

of a monopoly price 302 

34 Growth of Trusts and Combinations in the 

United States 

Growth of large industry in the United States — Ad- 
vantages of large production — Causes of industrial 
combinations 312 

35 Effect of Trusts on Prices 

How trusts might affect prices — How trusts have af- 
fected prices 323 

36 Gambling, Speculation, and Promoters ' Profits 

Gambling vs. insurance — The speculator as a risk- 
taker — Promoter's and trustee's profits . . . . . 333 



CONTENTS xi 

CHAPTER PAGE 

37 Crises and Industrial Depressions 

Definition and description of crises — Crises in the nine- 
teenth century — Various explanations of crises . . . 345 

PART III 
The Social Aspects of Value ..... 357-563 

DIVISION A— RELATION OF PRIVATE INCOME 
TO SOCIAL WELFARE 

38 Private Property and Inheritance 

Impersonal and personal shares of income — The origin 
of private property — Limitations of the right of pri- 
vate property 359 

39 Income and Social Service 

Income from property — Income from personal services 370 

40 Waste and Luxury 

Waste of wealth — Luxury 381 

41 Reaction of Consumption on Production 

Reaction upon material productive agents — Reaction 
upon the efficiency of the workers — Effects on the 
abiding welfare of the consumer 392 

42 Distribution of the Social Income 

The nature of personal distribution — Methods of per- 
sonal distribution 402 

43 Survey of the Theory of Value 

Review of the plan followed — Relation of value theories 

to social reforms — Interrelation of economic agents . 412 

DIVISION B— RELATION OF THE STATE TO INDUSTRY 

44 Free Competition and State Action 

Competition and custom — Economic harmony through 
competition — Social limiting of competition . . . 422 

45 Use, Coinage, and Value of Money 

The precious metals as money — The quantity tlieory of 
money 431 

46 Token Coinage and Government Paper ]\Ioney 

Light-weight coins — Paper money experiments — Theo- 
ries of political money 443 






xii CONTENTS 

CUAPTEE PAGE 

47 The Standard of Deferred Payments 

Function of the standard — International bimetallism 

— The free-silver movement in America 453 

48 Banking and Credit 

Functions of a bank — Typical bank money — Banks of 
the United States to-day 462 

49 Taxation in its Relation to Value 

Purposes of taxation — Forma of taxation — Principles 
and practice 471 

50 The General Theory of International Trade 

International trade as a case of exchange — Theory of 
foreign exchanges of money — Real benefits of foreign 
trade 480 

51 The Protective Tariff 

The nature and claims of protection — The reasonable 
measure of justification of protection — Values as af- 
fected by protection 491 

52 Other Protective Social and Labor Legislation 

Social legislation — Labor legislation 504 

53 Public Ownership of Industry 

Examples of public ownership — Economic aspects of 
public ownership 514 

54 Railroads and Industry 

Transportation as a form of production — The railroad 

as a carrier — Discrimination in rates on railroads . 525 

55 The Public Nature of Railroads 

Public privileges of railroad corporations — Political 
and economic power of railroad managers — Commis- 
sions to control railroads 534 

56 Public Policy as to Control of Industry 

State regulation of corporate industry — Difficulties of 
public control of industry — Trend of policy as to pub- 
•c industrial activity 544 

57 Future Trend of Values 

Past and present of economic society — The economic 

future of society 555 

References, questions, and exercises 565 

Index 637 



PREFACE TO FIRST EDITION* 

This book had its beginning ten years ago in a series of 
brief discussions supplementing a text used in the class- 
room. Their purpose was to amend certain theoretical views 
even then generally questioned by economists, and to present 
most recent opinions on some other questions. These criti- 
cal comments evolved into a course of lectures following an 
original outline, and were at length reduced to manuscript 
in the form of a stenographic report made from day to day 
in the class-room. The propositions printed in italics were 
dictated to the class, to give the key-note to the main divi- 
sions of the argument. Repeated revisions have shortened 
the text, cut out many digressions and illustrations, and 
remedied many of the faults both of thought and of ex- 
pression ; but no etf ort has been made to conceal or alter the 
original and essential character of the simple, informal, class- 
room talks by teacher to student. To this origin are trace- 
able many conversational phrases and local illustrations, 
and the occasional use of the personal form of address. 

The lectures, at the outset, sought to give merely a sum- 
mary of widely accepted economic theory, not to offer any 
contribution to the subject. While they were in progress, 
however, special studies in the evolution of the economic 
concepts were pursued, and the manuscript of a book on 
that more special subject was carried well toward comple- 
tion. That work, which it is hoped some time to complete, 
was, for several reasons, put aside while the present text 
was preparing for publication. The economic theories of the 
present transition period show many discordant elements, 



Abridged. 



sill 



siv PREFACE 

yet the author felt that his attempt to unify the statement 
of principles, in an elementary text explaining modern prob- 
lems, and consistent in its various parts, helped to reveal 
to him both difficulties and possible solutions in the more 
special theoretical field. The unforeseen outcome of these 
varied studies is an elementary text embodying a new con- 
ception of the theory of .distribution, an outline of which 
will be found in Chapter Forty-three. It is, in brief, a con- 
sistently subjective analysis of the relations of goods to 
wants, in place of the admixture of objective and subjective 
distinctions found in the traditional conceptions of rent, 
interest, and price. 

The beginning of the systematic study of economics, like 
the first steps in a language, is difficult because of the 
entire strangeness of the thought, and it is not to be hoped 
that any pedagogic device can do away with the need of 
strenuous thinking by the student. The aim, however, in 
the development of this theory of distribution, has been to 
proceed gradually, as in a series of geometrical proposi- 
tions, from the simple and familiar acts and experiences of 
the individual's every-day life, through the more complex 
relations, to the most complex, practical, economic problems 
of the day. The hope has long been entertained by econom- 
ists that a conception of the whole problem of value would 
be attained that would coordinate and unify the various 
"laws," — those of rent, wages, interest, etc. This solution 
has here been sought by a development of recent theories, 
the unit of the complex problem of value being the simplest, 
immediate, temporary gratification. 

The fifty-seven chapters represent the work of the typical 
college course in elementary economics, allowing two chap- 
ters a week, and a third meeting weekly for review and for 
the discussion of questions, exercises, and reports. The sub- 
ject is so large that the text is, in many places, hardly more 
than a suggestive outline. In class-room work it should be 
supplemented by other sources of information, such as per- 



PREFACE XV 

sonal observation bj^ the students (many of the questions 
following the text serving to stimulate the attention) ; visits 
to local industries ; interchange of opinions ; examples given 
by the teacher ; study and discussion, in the light of the 
principles stated in the text, of some such problems as are 
suggested in the appended list of questions; collateral read- 
ing ; the preparation of exercises and the use of statistical 
material from the census, labor reports, etc. ; history and de- 
scription of industries; history of the growth of economic 
ideas. Suggestions, from teachers, of changes that will 
make the text more useful in their classes, will be thankfully 
received by the author. 

No book on economics can to-day satisfy everybody — *'0r 
even anybody, ' ' adds a friend. But with this book may go 
the hope that what has been written with love of truth and 
of democracy may serve, in its small way, both to further 
the cause of sound economic reasoning and to extend among 
American citizens a better understanding of the economic 
problems set for this generation to solve. 

*JZ> Jf. M, ^ 4U >U. ^ -V- 

In printing this book the second and third times a number 
of clerical and typographical errors of the first edition were 
corrected. In the second edition the chief change was the 
addition of bibliographies and exercises. The destruction 
of a portion of the plates in a fire gave occasion to revise 
in the third edition many statements of fact in the latter 
part of the text (pp. 441 on). 



PART I 
THE VALUE OF MATERIAL THINOS 



THE 

PRINCIPLES OF ECONOMICS 

tr^ O ii J 

PART I 

DIVISION A -WANTS AND PRESENT GOODS 

CHAPTER 1 

THE NATURE AND PURPOSE OF POLITICAL 

ECONOMY 

§ I. NAME AND DEFINITION 

1. Economics, or political economy, may he defined, verbal 
briefly, as the study of m,en earning a living; or^ more fully, 
as the study of the material world and of the activities and nomics 
mutual relations of men so far as all these are the ob- 
jective conditions to gratifying desires. To define, means to 
mark off the limits of a subject, to tell what questions are 
or are not included within it. The ideas of most persons on 
this subject are vague, yet it would be very desirable if the 
student could approach this study with an exact under- 
standing of the nature of the questions with which it deals. 
Until a subject has been studied, however, a definition in 
mere words cannot greatly aid in marking it off clearly 
in our thought. The essential thing for the student is 
to spo clearly the central purpose of the study, not to 
decide at once all of the puzzling cases. 

3 



definition 
of eco- 



4 NATURE AND PURPOSE OF POLITICAL ECONOMY [CH. l 



Natural 
sciences 
deal with 
material 
things 



Economics 
studies 
some social 
acts and re- 
lations 



2. A definition that suggests clear and familiar thoughts 
to the student seems at first much more difficult to get in any 
social science than in the natural sciences. These deal with 
concrete, material things which we are accustomed to see, 
handle, and measure. If a mere child is told that botany is 
a study in which he may learn about flowers, trees, and 
plants, the answer is fairly satisfying, for he at once thinks 
of many things of that kind. When, in like manner zoology 
is defined as the study of animals, or geology as the study of 
rocks and the earth, the words call up memories of many fa- 
miliar objects. Even so difficult and foreign-looking a word 
as ichthyology seems to be made clear by the statement that 
it is the name of the study in which one learns about fish. It 
is true that there may be some misunderstanding as to the 
way in wdiich these subjects are studied, for botany is not in 
the main to teach how to cultivate plants in the garden, nor 
ichthyology how to catch fish or to propagate them in a pond. 
But the main purpose of these studies is clear at the outset 
from these simple definitions. Indeed, as the study is pur- 
sued, and knowledge widens to take in the manifold and va- 
rious forms of life, the boundaries of the special sciences 
become not more but less sharp and definite. 

Political economy, on the other hand, as one of the social 
sciences, which deal with men and their relations in society, 
seems to be a very much more complex thought to get hold 
of. We are tempted to say that it deals with less familiar 
things ; but the truth may be, as a thoughtful friend suggests, 
that the simple social acts and relations are more familiar 
to our thought than are lions, palm-trees, or even horses. 
Every hour in the streets or stores, one may witness thou- 
sands of acts, such as bargains, labor, payments, that are the 
subject-matter of economic science. Their very familiarity 
may cause men to overlook their deeper meaning. 

Many other definitions have been given of political econ- 
omy. It has been called the science of wealth, or the science 
of exchanges. Evidently there are various ways in which 



$ II] THE SOCIAL SCIENCES 5 

wealth may be considered or exchanges made. The particu- 
lar aspects that are dealt with in political economy will be 
made clear by considering two other questions, the place of 
economics among the social sciences and the relation of 
economics to practical affairs. 

§ II. PLACE OF ECONOMICS AMONG THE SOCIAL SCIENCES 

1. Political economy, as one of the social sciences, may Economics 
he contrasted with the natural sciences, ivhich deal with ma- contrasted 

. . . with the 

terial things and their mutual relations, while it deals with natural 
one aspect of men's life in society, namely, the earning of a sciences 
living, or the use of wealth. It is true that political economy 
also has to do with plants and animals and the earth — in 
fact, with all of those things which are the subject-matter of 
the natural sciences ; but it has to do with them only in so 
far as they are related to man's welfare and affect his esti- 
mate of the value of things ; only in so far as they are related 
to the one central subject of economic interest, the earning 
of a living. 

2. The social sciences deal with men and their relations character 

with each other. The word "social" comes from the Latin o' the so- 
cial sci- 
socius, meaning a fellow, comrade, companion, associate. As ences 

men living together have to do with each other in a great 
many different ways, and enter into a great many different 
relations, there arise a great many different social problems. 
Each of the social sciences attempts to study man in some 
one important aspect— that is, to view these relations from 
some one standpoint. 

Man's acts, his life, and his motives are so complex that it 
is not surprising that there has been less definiteness in the 
thought of the social sciences, and that they have advanced 
less rapidly toward exactness in their conclusions, than have 
the natural sciences. This complexity also explains the dis- 
couragement of the beginner in the early lessons in this sub- 
ject. Usually the greatest difficulties appear in the first few 



6 NATURE AND PURPOSE OF POLITICAL ECONOMY [CH. l 



Economics, 
politics, 
law, and 
ethics 



weeks of its study. The thought is more abstract than in 
natural science ; it requires a different, I will not say higher, 
kind of ability than does mathematics. But little by little the 
strangeness of the language and ideas disappears ; the bare 
definitions become clothed with the facts of observation and 
recalled experiences; and soon the "economic" acts and re- 
lations of men in society come to be as real and as interesting 
to the student as are the materials in the natural world about 
him — often, indeed, more interesting. 

3. Political economy is related to all the otlier social 
sciences, it being the study of certain of men's r-elations, 
while politics, law, and ethics have to do with other relations 
or with relations under a different aspect. Politics treats of 
the form and working of government and is mainly con- 
cerned with the question of power or control of the indi- 
vidual 's actions and liberty. Law treats of the precepts and 
regulations in accordance with which the actions of men are 
limited by the state, and the contracts into which they have 
seen fit to enter are interpreted. Ethics treats the question 
of right or wrong, studies the moral aspects of men's acts 
and relations. The attempt just made to distinguish between 
the fields occupied by the various social sciences betrays at 
once the fundamental unity existing among them. The acts 
of men are closely related in their lives, but they may be 
looked at from different sides. The central thought in eco- 
nomics is the business relation, the relation of men in ex- 
changing their services or material wealth. In pursuing 
economic inquiries we come into contact with political, legal, 
and ethical considerations, all of which must be recog- 
nized before a final practical answer can be given to any 
question. Nevertheless the province of economics is limited. 
It is because of the feebleness of our mental power that we 
divide and subdivide these complex questions and try to 
answer certain parts before we seek to answer the whole. 
When we attempt this final and more difficult task, we should 
rise to the standpoint of the social philosopher. 



§111] RELATION TO PRACTICAL AFFAIRS 7 

§ III. THE RELATION OF ECONOMICS TO PRACTICAL AFFAIRS 

1. The ideal of political economy here set forth is that Economics 
it should he a science, a search for truth, a systematized body l^„^t.^ 
of knowledge, arriving at a statement of the laws to which 
economic actions conform. It is not the advocacy of any 
particular policy or idea, but if it arrives at any conclu- 
sions, any truths, these cannot fail to affect the practical 

action of men. 

Political economy, because defined as the science of wealth, But it 
has been described by some as a gospel of Mammon. It is *°"'''^®® 

. many 

hardly necessary to refute such a misconception. Political practical 
economy is not the science of wealth-getting for the indi- i"^®'^®^'^^ 
vidual. Its study is not primarily for the selfish ends and 
interest of the individual. Certainly some of its lessons 
may be of practical value to men in active business, for 
many economic "principles" are but the general statement 
of those ideas that have been approved by the experience 
of business men, of statesmen, and of the masses of men. 
Some of its lessons must have educational value in prac- 
tical business, for political economy is not dreamed out by 
the closet philosopher, but more and more it is the attempt 
to describe the interests and the action of the practical 
world in which men must live. Many men are working 
together to develop its study— those who collect statistics 
and facts bearing on all kinds of practical affairs, and those 
who search through the records of the past for illustrations 
of experiments and experiences that may help us in our 
life to-day. 

2. But, in the main, the study of political economy is a Economic 
social studii for social ends and not a selfish study for in- **"'^y 

•^ ' . . ' /. needed in a 

dividual advantage. The name political economy was first democracy 
suggested in Prance when the government was monarchical 
and despotic in the extreme. As domestic economy indicates 
a set of rules or principles to guide wisely the action of the 



8 NATURE AND PURPOSE OF POLITICAL ECONOMY [CH. l 

housekeeper or the owner of an estate, so political economy- 
was first thought of as a set of rules or principles to guide the 
king and his counselors in the control of the state. The term 
has continued to bear something of that suggestion in it, 
though of late the term "economics," as being broader and 
less likely to be confused with politics, has very generally 
come into use. But in the degree in which unlimited mon- 
archy has given way to the rule of the people, the concep- 
tion of political economy has been modified. In a democracy 
there is need for a general diffusion of knowledge. The 
power now rests not with the king and a few counselors, 
but in the last resort with the people, and therefore the 
people must be acquainted with the experience of the past, 
must have all possible systematic knowledge to enlighten 
public policy and to guide legislation. 
Is of grow- Moreover, with the growth of the modern state, with the 
lnd^°^"^^^ increasing importance of business, and of industrial and 
influence commercial interests, as compared with changes of dynasty or 
the personal rivalries of rulers, economic questions have 
grown in relative importance. In our own country, par- 
ticularly since the subjects of slavery and of States' rights 
ceased to absorb the attention of our people, economic ques- 
tions have pushed rapidly into the foreground. Indeed, it 
has of late been more clearly seen that many of the older 
political questions, such as the American Revolution and 
slavery, formerly discussed almost entirely in their political 
and constitutional aspects, were at bottom questions of eco- 
nomic rivalry and of economic welfare. The remarkable in- 
crease in the attention given to this study in colleges and uni- 
versities in the last twenty years is but the index of the 
greatly increased interest and attention felt in it by citizens 
generally. 

To sum up, it may be said that in the study of political 
economy we are seeking the reason, connection, and relations 
in the great multitude of acts arising out of the dependence 
of desires on the world of things and men. 



CHAPTER 2 
ECONOMIC MOTIVES 

§ I. MATERIAL WANTS, THE PRIMARY ECONOMIC MOTIVES 

1. A logical explanation of industry must begin with Feeling 
a discussion of the nature of wants, for the purpose of in- "'■8^^*° 

,,. ., . t- f I economic 

austry is to gratify wants. An _ economie _ want may be de- actions 
fined as a feeling of incompleteness, because of the lack of a 
part of the outer world or of some change in it. Often the 
question asked when one first sees a moving trolley car or 
automobile or bicycle is : What makes it go ? The first ques- 
tion to ask in the part of the study of economic society here 
undertaken is : \Yhat is its motive force ? Without an 
answer to that question one cannot hope to understand the 
ceaseless and varied activities of men occupied in the mak- 
ing of a living. The question merits long and careful study, 
but the general answer is so simple that it seems almost 
self-evident: The motive force in economics is found in the 
feelings of men. It is men's desire to make use of men and 
things about them which calls forth all the manifold phenom- 
ena studied in economics. 

2. Wants among animals depend on the environment; Animal 
that is to say, the utmost thai creatures of a lower order ^P^"^f 

, . shaped by 

than man can do is to take things as they find them. The their en- 
imagination and intelligence of animals are not developed ^r°i™s°* 
enough to lead them to desire much beyond that which is 
ordinarily to be obtained. And so the environment shapes 
and affects the animal. The fish is fitted to live in the water 
and thrives there, and we must believe, enjoys living there. 

9 



10 



ECONOMIC MOTIVES 



[CH. 2 



Simple 
wants of 
primitive 
men 



Manifold 
wants in 
civilized 
society 



The horse and the cow like best the food of the fields, and 
so each species of animal, in order to survive in the severe 
struggle for existence, has been forced to fit itself to the con- 
ditions in which it lives. After the animal has been thus 
fitted, its desire is for those things normally to be found 
in its surroundings. So different animals desire or want 
different things, but always it is the environment that de- 
termines the want, and not the want that determines the 
environment. 

3. In simpler human societies, wants are mostly confined 
to physical necessities; that is, in the earlier stages of society, 
man's wants are very much like those of the animals. Man 
bends his energies to securing the things necessary to sur- 
vival. He feels the pangs of hunger and he strives to secure 
food. He feels the need of companionship, for it is only 
through association and mutual help that men, so weak as 
compared with many kinds of animals, are able to resist the 
enemies which beset them. He needs clothing to protect him 
against the harsher climates of the lands to which he moves. 
For the same purpose, to protect himself against the cold and 
rain, he needs a shelter, a cave, a wigwam, or a hut; for a 
house is but a larger dress. 

4. In human society, wants develop and transform the 
world. In the rudest societies of which there is any record, 
savages are found with wants developed in a great number 
of directions beyond the wants of any animals. Man is not 
a passive victim of circumstances; his wants are not deter- 
mined solely by his environment; his desires soar beyond 
the things about him. As men become more the masters 
of circumstances, their desires anticipate mere physical 
wants ; they seek a more varied food of finer flavor and more 
delicately prepared. Dress is not limited by physical com- 
fort, for one of the earliest of the esthetic wants to develop 
is the love of personal ornament. The rude hut or com- 
munal lodge to protect against rain and cold becomes a 
home. Out of the earlier rude companionship develop the 



§Ij PRIMARY ECONOMIC MOTIVES 11 

noblest sentiments of friendship and family life. Seeking 
to gratify the senses and the love of action, men develop 
esthetic tastes, the love of the beautiful in sound, in form, 
in taste, in color, in motion. And finally, as the imagination 
and intellect develop, there grow up the various forms of 
intellectual pleasures— the love of reading, of study, of 
travel, and of thought. 

The various wants of man are sometimes classified as neces- 
sities, comforts, and luxuries, but all economists take care 
to emphasize that these terms have only relative meanings 
which, in the rapidly changing conditions of modern life, are 
changing constantly. The comforts of one generation, or of 
one country, become the necessities in another; and luxuries 
becoming comforts, are looked upon finally as necessities. 
And as the desires grow, they more and more alter the world, 
Man has changed the face of the earth; he has affected its 
climate, its fertility, its beauty, because, either for better or 
for worse, his desires have impressed themselves upon the 
world about him. 

5. In human society the groivth of wants is necessary to wants 
progress. From the earliest times teachers of morals have ™"stpre- 
argued for simplicity of life and against the development wealth 
of refinements. AVe do not now raise the moral question, 
but there is no doubt that the economic effect of developing 
wants is in the main to impel to greater effort. They are 
the mainspring of economic progress. In recent discussion 
of the control of the tropics, the too great contentedness of 
tropical peoples has been brought out prominently. Some 
one has said that if a colony of New England school-teach- 
ers and Presbyterian deacons should settle in the tropics, 
their descendants Avould, in a single generation, be wearing 
breech-clouts and going to cock-fights on Sunday. Certain 
it is that the energy and ambition of the temperate zone are 
hard to maintain in warmer lands. The negro's content with 
hard conditions, so often counted as a virtue, is one of the 
difficulties in the way of solving the race problem in our 



12 



ECONOMIC MOTIVES 



[CH2. 



But impos- 
sible hopes 
lessen 
gratifica- 
tions 



Wants 
grow 
refined as 
wealth 
advances 



South to-day. Booker T. Washington, and others who are 
laboring for the elevation of the American negroes, would try 
first to make them discontented with the one-room cabins, in 
which hundreds of thousands of families live. If only the de- 
sire for a two- or three-room cabin can be aroused, experience 
shows that family life and industrial qualities may be im- 
proved in many other ways. 

Not only in America, but in most civilized lands to- 
day, is seen a rapid growth of wants in the working-classes. 
The incomes and the standard of living have been increas- 
ing, but not so fast as have the desires of the working-classes. 
Regret has been expressed by some that the workers of 
Europe are becoming "declassed." Increasing wages, it is 
said, bring not welfare, but unhappiness, to the complaining 
masses. If discontent with one's lot goes beyond a moderate 
degree, if it is more than the desire to better one's lot by 
personal efforts, if it becomes an unhappy longing for the 
impossible, then indeed it may be a misfortune. But a mod- 
erate ambition to better one's condition is the "divine dis- 
content" absolutely indispensable if energy and enterprise 
are to be called into being. 

It is a suggestive fact that civilized man, equipped with 
all of the inventions and the advantages of science, spends 
more hours of effort in gaining a livelihood than does the 
savage with his almost unaided hands. Activity is dependent 
not on bare physical necessity, but on developed wants— in 
the economic sense of the term. Such social institutions as 
property and inheritance owe their origin and their justifi- 
cation to their average effect on the motives to activity. If 
society is to develop, if progress is to continue, human wants 
—not of the grosser sort, but ever more refined— must con- 
tinue to emerge and urge men to action. 



§11] 



SECONDARY ECONOMIC MOTIVES 



13 



n. DESIRES FOR NON-MATERIAL ENDS, AS SECONDARY 
ECONOMIC MOTIVES 



1. The spiritual nature of man must not be ignored in 
economic reasoning. There has been much and just criticism 
of the earlier writers and of their conclusions because 
so little account was taken by them of any but the 
motive of self-interest in economic affairs. Generally it was 
assumed that men knew their own interest, and sought in a 
very unsympathetic way those things which would gratify 
their material wants. Thus man in economic reasoning was 
made an abstraction, differing from real men in his lack of 
manifold spiritual and social elements. 

2. The main classes of non-material wants that are sec- 
ondarily economic are fear of temporal punishment; senti- 
ments of inoral and religious duty; pride, honor, and fear 
of disgrace; and pleasure in work for itself, for social ap- 
proval, or for a social result. The first is best illustrated by 
slavery, where the slave is not impelled to seek wealth for 
his own welfare, but is driven by punishment to perform the 
task. The object is to create within the mind of the slave 
a motive that will take the place of the ordinary economic 
motive. The feeling of religious or moral duty leads men 
to act often in direct opposition to the usual economic mo- 
tive. The taboo is faithfully observed by the members of a 
savage tribe who suffer as a result the severest hardships. 
A religious injunction prevents the use of food that would 
save from starvation. Pride, either of family or of calling; 
the soldier's honor leading him to sacrifice not only his fu- 
ture but his life; the love of social approval, holding men to 
the most disagreeable tasks— these illustrate how strongly 
social sentiments oppose the narrower motive of immediate 
self-interest as generally thought of. Pleasure in work for 
work's sake, and pride in the result, may act as motives quite 
as strong in some cases as desire for the product that can 



The real 
man in 
economics 



Desires lor 
the non- 
material 
may 
become 
economic 
motives 



14 



ECONOMIC MOTIVES 



ICH. 2 



Economists 
must over- 



be used. And even where this does not change the kind of 
work done, it comes in to influence the interest and earnest- 
ness with which the work is performed. 

3. Whatever motive in man's complex nature makes him 
desire thinqs more or less, becomes for the time, and in so 

look no .... 

influence on far, an econonuc motive. These various social and spiritual 
value motives sometimes work positively, in the direction of mag- 

nifying man's desire for things; sometimes negatively, to 
diminish it. If we are to understand economic action, we 
must take men as they are. A religious motive that leads 
men to refrain from the eating of meat or to eat fish in 
preference on certain days, is a fact which the economist has 
but to accept, for it is sure to affect the value of meat and 
fish at that place and time. Moral convictions, whatever 
be their origin, whether due to the teaching of parents, to 
unconscious influences, or to native temperament, may be 
quite as effective as the pangs of hunger in determining 
what men desire. Therefore, while these various motives 
are primarily social or moral or religious, they may be said 
to be secondarily economic motives, and they may become in 
certain cases the most important influences of which the 
economist must take account. 



CHAPTER 3 
WEALTH AND WELFARE 

§ I. THE RELATION OF MEN AND MATERIAL THINGS TO ECO- 
NOMIC WELFARE 

1. The gratifying of economic wants depends on things Manisthe 
outside of the man who feels the wants. Man is to himself ^onomic 
the center of the world. He groups things and estimates reasoning 
things with reference to their bearing on his desires, be these 

what are called selfish or unselfish. If we were discussing 
the economics of an inferior species of animals, things would 
be grouped in a very different way. But economics being _ 
the study of man's welfare, everything must be judged from 
his standpoint, and things are or are not of economic im- 
portance according as they have relation to his wants and 
.satisfactions. Things needful for any of the lower animals 
are spoken of as "ministering to welfare" in the economic 
sense only in case these animals are useful to men. Ex- 
amples are the mulberry-tree on which the silkworm feeds, 
the flower visited by the honey-bee. In the same view some 
men are seen to minister to the welfare of other men and 
therefore bear the same relation for the moment to the wel- 
fare of the others as do material things. In any case we 
study man's welfare as affected by the world whicli sur- 
rounds him. 

2. Material things and natural forces differ in kind and Physical 
nature. This is an axiom which we must take as a basis unchange-" 
for reasoning in economics. Things have certain physical awefact 
qualities quite apart from any action or influence of man. 

15 



16 



WEALTH AND WELFARE 



[CH. 3 



But eco- 
nomics has 
to do with 
psychologi- 
cal effects 



Some 
definitions 



They are operated on by mechanical laws ; the force of gravi- 
tation causes them to fall at a certain rate under given con- 
ditions. They differ in specific gravity, reflect the rays of 
light, absorb or transmit heat. All these things are for man 
ultimate physical facts, but unless he knows these facts he 
cannot take full advantage of the favorable qualities of 
things or weigh properly their importance to his welfare. 
Things differ in a multitude of ways in their chemical quali- 
ties. Niter, charcoal, and saltpeter, combined in certain pro- 
portions, give certain reactions ; different combinations give 
various results. Solids combine to form gases, and liquids 
unite to form solids, and these qualities and reactions of 
material things are for man ultimate truths of chemistry. 
Likewise many things have certain physiological effects. 
Sunshine acts on living bodies, whether plant, animal, or 
man, in certain ways. Some plants are nourishing to man, 
others are poisonous. If man were not on the earth, things 
would have the same physical and chemical qualities, me- 
chanical laws would be the same as at present so far as we 
can conclude. Man cannot change the nature of things; 
but he can acquaint himself with that nature and then put 
the things into the relations where a given result will fol- 
low. 

3. As a result of these differences, tilings have different 
relations to wants. These various qualities, physical, chem- 
ical, physiological, are important in an economic sense only 
as they produce psychological effects, that is, as they affect 
the feelings and judgments of men. We come to some 
general thoughts which it will be well to define. 

Gratification is the feeling that results when a want has 
been met. Feelings are hard to define in words; the best 
definition is found in the experience of each individual. We 
can only say, therefore, that gratification is the attainment of 
desire, the fulfilment of wants. The word that has usually 
been employed in this sense in economic discussion is "sat- 
isfaction"; but by its derivation and general usage satisfac- 



m MEN AND THINGS 17 

tion means "the complete or full gratification" of a desire, 
and this meaning is quite inconsistent with the thought in 
many connections in which the Avord is used. We shall 
therefore prefer here the word gratification, and its cor- 
responding verb, gratify. 

Wealth is the collective term for those things which are 
felt to be related to the gratification of wants. The word is 
applied in economic discussion to any part of those things, 
no matter how small. We shall have occasion later to de- 
fine and discuss this term more fully. 

Welfare, in an immediate or narrow sense, is the same asi 
gratification of the moment; in a broader sense, it means/ 
the abiding condition of well-being. We have here a dis- 
tinction very much like that often made between pleasure 
and happiness. If we think of only the present moment, 
welfare is the absence of pain, and the presence of the 
pleasureable feeling; but if we consider a longer period in 
a man's life or his entire lifetime, it is seen that many things 
that afford a momentary gratification do not minister to his 
ultimate, or abiding, welfare. Moralists and philosophers 
often have dwelt on this contrast. The difference is illus- 
trated by the thoughtlessness and impulsiveness of a child 
or savage as contrasted with the more rational life of those 
with foresight and patience. 

4. Wealth, in the general economic sense, is judged with Economics 
reference to gratification rather than with reference to abid- first studies 

® _ wealth 

ing welfare. It is the first duty of the economist not to 
preach what should be, but to understand things as they are. 
He must, in studying the problem of value, recognize any 
motive that leads men to attach importance to acts and 
things«> He will therefore take account of abiding welfare 
and of immediate gratification to exactly the degree that men 
in general do, and the sad fact is that the present impulse 
rules a large part of the acts of men. Whether tobacco or 
alcohol or morphine minister to the abiding happiness of 
those who use them does not alter the immediate fact that 

2 



18 



WEALTH AND WELFARE 



[CH. 3 



Then 

wealth and 
welfare 



Freemen 
are not 
economic 
wealth 



here and now they are sought and an importance is at- 
tached to them because of their power to gratify an immedi- 
ate desire. 

5. In studying the question of social prosperity, how- 
ever, we must rise to the standpoint of the social philosopher 
and consider the more abiding effects of wealth. Wants 
may be developed and made rational, and the permanent 
prosperity of a community depends upon this result. Any 
species of animal that continued regularly to enjoy that 
which weakens the health and strength would become ex- 
tinct. Any society or individual that continues to derive 
gratification, to seek its pleasure, in ways that do not, on the 
average, minister to permanent welfare, sinks in the strug- 
gle of life and gives way to those men or nations that have 
a sounder and healthier adjustment of wants and welfare. 
We touch here, therefore, on the edge of the great prob- 
lems of morals, and while we must recognize the contrast that 
often exists in the life of any particular man between his 
"pleasures" and his health and happiness, we see that there 
is a reason why, on the whole, and in the long run, these two 
cannot remain far apart. The old proverbs, "Be virtuous 
and you will be happy," "Honesty is the best policy," and 
"Virtue is its own reward," have a sound basis in the age- 
long experience of the world. Cynics or jesters may easily 
disprove these truths in a multitude of particular cases. 

6. Wealth does not include such personal qualities as 
honesty, integrity, good liealth. Some economists speak of 
these as "internal goods," but it is far better not to speak 
of free men or of their qualities as wealth. Many difficul- 
ties arise from such a use of the term in practical discussion. 
One of the most important of all distinctions to maintain in 
economics is that between material things and men. Only in 
the case of human slavery may persons be counted as eco- 
nomic wealth. It is a different thing, however, to consider 
human services as wealth of an ephemeral kind at the mo- 
ment they are rendered. We are thus merely recognizing 



§11] SOME ECONOMIC CONCEPTS 19 

that men may bear at the given moment the same relation to 
our wants as do material things. 



§ II. SOME IMPORTANT ECONOMIC CONCEPTS CONNECTED WITH 

WEALTH AND WELFARE 

1. Utility, in its broadest usage, is the general capability popular 
that things have of ministering to liuman well being. The "gg^^°* 
term is evidently one without any scientific precision. It 
expresses only a general or average impression that we have 

in reference to the relation of a class of goods to human 
wants. Every one would agree to the statement that ' ' water 
is useful," thinking of the fact that it is indispensable to 
life and that it ministers to life in a multitude of ways. But 
what of water in one's cellar, water soaking one's clothes 
on a cold day, Avater breaking through the w^alls of a moun- 
tain reservoir and carrying death and destruction in its 
path? The poison that is doing what we at the moment 
desire, we call useful ; that doing what we would prevent, 
we call harmful. Noxious weeds become "useful" by the 
discovery of some new process by which they can be worked 
into other forms, though they may still continue to be noxious 
in many a farmer's fields. The utility of anything, therefore, 
is seen to be of a relative and limited nature. The term 
"utility" in popular speech is very inexact. It can be 
employed in economic discussion only when carefully modi- 
fied and defined. 

2. Goods consist of all those things objective to the user Kinds of 
which have a beneficial relation to human wants. They fall 
into several classes. We may first distinguish between free 
and economic goods. Free goods are things that exist in 
superfluity, that is, in quantities sufficient not only to gratify, 
but to satisfy all the wants that may depend on them. 
Economic goods are things so limited in quantity that all of 
the wants to which they could minister are not satisfied. 
The whole thought of economy begins with scarcity; in- 



goods 



20 



WEALTH AND WELFARE 



tCH. 3 



Value is 
utility 
given pre- 
cision 



deed, even the conception of free goods is hardly possible 
until some limitation of wants is experienced. Practical 
economics is the study of the best way to employ things 
to secure the highest amount of gratification. The problem 
itself arises out of the fact that many things are used up 
before all wants dependent on them are completely satisfied. 

A distinction is often made between consumption and 
production goods, or it may be better to say immediate and 
intermediate goods. Consumption goods are those things 
which are immediately at the point of gratifying man's 
desires. Production goods are those things which are not yet 
ready to gratify desires; some of them, being merely means 
of securing consumption goods, never will themselves im- 
mediately gratify desire. 

3. Value, in the narrow personal sense, may he defined 
as the importance attrihuted to a good hy a man. The 
vagueness and inexactness of the word "utility," or the 
word "good," disappears when we reach the word "value." 
It is not a usual relation or a vague degree of benefit some- 
times present and sometimes absent, but it refers to a par- 
ticular thing, person, time, and condition. Value, is in the 
closest relation with wants, and in this narrow sense de- 
pends on the individual's estimate. From the meeting and 
comparison of the estimates of individuals, arise market 
values or prices, which are the central object of study in 
economics. 



Wants and 
goods must 
be con- 



CHAPTER 4 
THE NATURE OF DEMAND 

§1. THE COMPARISON OP GOODS IN MAN's THOUGHT 

1. As wants differ in hind and degree, so goods differ in 
their power to gratify wants. This general and simple state- 
ment unites the leading thoughts of the two chapters pre- stantiy 
ceding. Confirmation of its truth may be found in observa- ^ ^"^ 
t.ion and experience. The purpose of this chapter is to show 
how, starting from the general nature of wants and the na- 
ture of goods, we can arrive at an explanation of the exchange 

of goods. Recognizing the simple but fundamental fact 
stated at the opening of this paragraph, an exchange may be 
seen to be a rational and a logical result when men are 
living together in society. 

2. Immediately enjoy ahle goods are the first objective Ripe and 
things u'hose value is to he explained. Goods come into rela- ^"p^^oo a 
tion with wants in a multitude of ways. Some things will 

not gratify a want until after the lapse of a long time, as 
ice cut in December and stored for summer use. Other 
things will never themselves directly gratify a want, but 
will be of help in getting things^that do; such are the young 
fruit trees planted in the orchard, and the hammer that will 
be used to drive nails in a house that will shelter men. Still 
other things are gratifying wants at this moment, or are 
ready for use and will be used up in a very short time ; exam- 
ples of such are the food on the table and in the pantry, and 
the cigar in the pocket. All these things are called goods, 
because of their beneficial relation to man's desires, but the 

21 



22 THE NATURE OF DEMAND [CH.4 

relation is very immediate in some cases, very remote in 
others. The value of all goods is to be explained, but the 
explanation will be more or less complex according to the 
directness or indirectness of their relation with wants. As 
it is the power of goods to gratify wants that alone causes 
value to be attributed to them, those goods which are ripest, 
which are ready to gratify wants, are nearest to the source 
of an explanation. The value of unripe enjoyments must be 
traced to some expected gratification as its cause or basis. 
In order to attack the difficulties one by one we will, therefore, 
in the following discussion, deal tirst with this class of ripe, 
consumable goods, as food, personal services, enjoyments of 
any sort that are immediately available. The explanation 
of these cases of value must precede that of cases in which 
the relation to wants is less obvious and direct. 
The law of 3. As the amouiit of any good increases, after a certain 
diminishing pQi^it Uiq qratifl.cation that the added portions a/ford de- 

utility . . 

creases. This is called the law of the diminishing utility of 
goods or of the decreasing gratification afforded by goods. 
The reason for the truth of this proposition is found in the 
very nature of man and his nervous organization. Any stim- 
ulus to the nerves, however pleasant at first, becomes painful 
when long continued or increased unduly. The trumpet too 
distant at first for the ear to distinguish its notes, may swell 
to pleasing tones as it approaches, until at length its volume 
and its din may become absolutely painful. If we were 
to express the degree of gratification by a curve, we should 
see the curve rising gradually to a maximum, and then 
falling somewhat suddenly and becoming a negative quan- 
tity, when pain, not pleasure, resulted. The same change 
could be illustrated by any sensation or by any of men's 
activities. 

The proposition must be understood as applying to the 
gratification resulting from each added portion of the sen- 
sation. There is a maximum point in the gratification af- 
forded by any nerve-stimulus. A man coming in from 



§1] COMPARISON OF GOODS IN MAN'S THOUGHT 23 

the winter's storm and holding out his hands before the 
fire, feels an intense pleasure in the grateful warmth ; a few 
moments later, the same heat becomes unpleasant. In win- 
ter we wish for a moderation of the temperature; on the 
sultry days of summer, we think of a cool breeze as the most 
to be desired of all things. Whether the temperature rises 
or falls, there is a point beyond which the change is no 
longer an addition to, but a subtraction from, pleasure. A 
man, hoAvever hungry at first, may be made miserable if 
forced to eat beyond his capacity. Each added portion of the 
good consumed contributes to the gratification up to a certain 
point. The sum of these pleasurable sensations may be 
called the total gratification, which finally reaches satisfac- 
tion or fullness. Then begins what may be called in alge- 
braic phrase a ' ' negative gratification ' ' which, if it becomes 
large enough, will make the total gratification a negative 
quantity. Each added portion, dose or increment beyond a 
certain point reduces thus the welfare of the user. One 
may have too much of a good thing. 
\^ 4. Marginal utility is the gratification afforded hy the 
-—^ded portion of the good. The marginal dose, increment, or ^°* " ' 
portion is that which may be logically considered as coming 
last in the case of any good or group of goods divisible into 
small parts. In considering the strict theory of the case, 
in order to get at the principle involved, the doses may be 
spoken of as infinitesimally small. The marginal utility ex- 
presses the importance that men attach to one unit of this 
kind of goods under the particular circumstances at the 
moment existing, and not under certain conceivable con- 
ditions which do not in fact exist or need to be taken 
into account by the persons affected. The marginal unit 
of a homogeneous supply cannot be considered to have a 
greater utility than any other unit at the moment, and there- 
fore the product of the marginal utility by the number of 
units, gives the total measure of importance of the supply 
then and there, and this is the value. 



The mar- 



24 



THE NATURE OF DEMAND 



[CH. 4 



From mar- 
ginal utility 
to value 



The value of goods, as has been indicated, is the measure 
of the dependence felt by men on a portion of the outer 
world, as the condition of gratifying their wants. From 
the very nature of wants, which reside in feelings, a de- 
pendence that is not felt, a relation between things and 
gratification that is not recognized, can have no influence 
on value. Now, it is at this margin of supply that depen- 
dence is felt. Men do not concern themselves about that 
which they have in superfluity — unless, indeed, the excess 
causes them some discomfort. It is well that they do not, 
for a wise direction of effort can only take place when men 
think mainly of their need of things that they want, and 
want most, and direct their efforts toward securing them. 

The diminishing utility of successive portions (doses or 
increments, as they are called) may be represented by a 
curve of utility. 



40 

i 






c 


• 


\ 


a 







1 




e 




<J in 





1 

1 

- T- 
1 




<^ 


1 




V) "> 




1 
1 

1 










. 






1 
i 










< 



20 JO •♦0 50 

Scale of Supply 



The diagram is constructed on the hypothesis that a tenth 
unit of a certain good would have a utility expressed as 
36; a fifteenth unit of 30, etc., and that the value of the 
whole supply is estimated according to these marginal units. 
Of course if the conditions were that "all or none" was to be 
taken, the result would be different. 



HJ COMPARISON OF GOODS IN MAN'S THOUGHT 25 



Unit of Suppl7 


Marginal Utility 


Value of Whole Supply 


10 


36 


360 


15 


30 


450 


20 


25 


500 


30 


19 


570 


40 


15 


600 


50 


10 


500 


60 


5 


300 



This diagram is frequently used, and it is important to 
guard against some misunderstandings. The marginal unit 
of any given supply — for example, ten units — is not any par- 
ticular unit, it is any one of the ten units. In the presence 
of nine units of the good the person or persons find all the 
various wants that are dependent on that good gratified to 
such a degree that the tenth unit has an importance expressed 
by 36. But as this last or marginal unit of supply may 
be used for any of the purposes, the importance of each 
and every unit likewise will be expressed by 36. Any one 
of the units, when once present is, in a logical sense, a 
marginal unit. When, however, it is a question of increasing 
the supply, some one unit may properly be looked upon as 
marginal. The dependence felt by men on the whole group is 
the product of the units by the marginal utility. As the 
number of units increases, the marginal utility decreases, 
until at length it may reach zero, and the total value would be 
nothing. A point of maximum value evidently will be found 
somewhere between the two extremes. 

Note carefully that on the one diagram are represented a oniyone 
large number of marginal utilities which never exist at one ™^'^s'°*i 

_ ^ utility at 

and the same moment. At any one moment there is a given onemomem 
number of units and there is but one marginal utility, and 
this is the same for each of the units. It is quite erroneous to 
say that when there are 30 units the utility of the tenth unit 
is 36; of the twentieth, 25; of the thirtieth, 19. It is equally 
incorrect to say that when there are 60 units the "total util- 
ity " is equal to the area between the right angle and the 



26 



THE NATURE OF DEMAND 



[CH. 4 



Changing 
feelings 
changes 
utility 



curve a-g, while the value is equal to the rectangle below 
and to the left of the point g. The curve from a-g but 
marks the height of marginal utilities that have no existence 
when the supply is 60. The " total utility," often spoken of 
in this connection, if it has any existence certainly cannot be 
calculated. The diagram must be understood as representing 
indicatively at any given moment but one marginal utility, 
the same for every unit of like goods. The other perpendic- 
ular lines are expressed in the conditional mood; they are 
what the marginal utility would be were the numbers of 
units different. 

5. Since goods possess utility only as they gratify wants, 
it follows that if wants change, the utility changes. Utility 
does not rest unchanging in the goods as something "intrin- 
sic," but it depends on the relation of goods to men. This 
truth, unrecognized for many centuries, is now seen to be 
fundamental to the whole problem of value. The portions 
of a good added later do not appeal to the same man as the 
earlier portions. The man has been changed by what he has 
enjoyed. In changing his feelings, goods have also changed 
his wants. Hence, the added portions of the good are changed 
in respect to their utility or power to gratify a man's wants. 
Though physically and chemically, i.e., in every material 
way, they are exactly like the earlier portions, they cannot 
have the same want-gratifying power until he again changes, 
for they are not in the presence of the same feelings. 

Wants are constantly shifting; different kinds of goods 
are compared in man's thought and arranged on a scale at 
every moment according to their felt utility. An increase 
in the amount of a good will drop the marginal utility of the 
added portions down the scale of usefulness for the next 
moment. When we rise in the morning, we want our break- 
fast ; the breakfast eaten, another breakfast does not appeal 
to us. Our tasks done, we take a boat-ride or go golfing; 
then, appetite returning, we are tempted to our dinner. And 
thus from hour to hour wants are gratified, are altered and 



§11] DESIKE BECOMES DEMAND 27 

are shifted, until, wearied with the day's labor and pastimes, 
we go to rest. In a well-ordered life, in an advanced eco- 
nomic society, the means for gratifying our wants as they 
arise are provided in advance. The changing series of desires 
is met by a changing series of goods. Life has been defined 
as a constant adjustment of inner relations to outer con- 
ditions. Economic life is therefore like physical life, a con- 
stant adjustment ; and this adjustment of goods but reflects 
the shifting and adjustment of feelings. 

6. T]ie substitution of goods in men's thought is the Choiceis 
shifting of the choice from a good that does not give the g^j^w^^ 
highest gratification economically possible at the time, to 
another good that does. The shifting that takes place on the 
scale of gratification makes it necessary for man to shift 
constantly his choice of goods. This again is the problem 
of "economy.". AVaste results when goods continue to be 
used to secure a lower degree of gratification, if they might 
be used to secure a higher. The change of choice may be 
because of a change in the man, or because of a change in the 
quality or the quantity of the goods ; or because of a change 
in the ratio at which the goods can be secured. 

§ II. DEMAND FOR GOODS GROWS OUT OF SUBJECTIVE COM- 
>X PARISONS 

1. Demand is desire for goods united with the power to Desiremay 
give something in excliange. An example frequently given ^^^comede- 
to show the difference between desire and demand is the 
hungry boy looking longingly at the sweetmeats in the con- 
fectioner's window. He represents desire, but not until the 
kind-hearted gentleman gives him a nickel does he represent 
effective demand. Desire, therefore, must be united with 
power to give something in exchange before it can be called 
demand. It must be for something that is attainable; 
yearning for something beyond reach, sighing for the moon, 
is desire that never can become effective demand. 



28 



THE NATURE OF DEMAND 



[CH. 4 



Demand the 
social ex- 
pression of 
shifting 
choice 



The limit of 
the ex- 
changer's 
demand 



2. Demand is the social aspect of the individual man's 
comparison of utilities. It is the expression of the man's 
wish to substitute some of his goods for some one else's 
goods in order to get a higher satisfaction. This compari- 
son is often made between two goods owned in different 
quantities. When men are constantly comparing things in 
their own possession, it is a short step to compare their 
goods with their neighbor's. 

Demand for consumption goods is thus the manifestation 
of the man's desire to redistribute his enjoyments. In de- 
mand for goods men virtually say : ' ' Part of what I have I 
am ready to give for part of what you have." The strength 
of their desire is expressed by the amount of their offer. 
When he makes this comparison and this offer, man enters 
into a social, economic relation with his fellows. 

3. The law of individual demand is: The trader will re- 
duce his stock of a particular good to the point where its 
marginal utility equals that of the alternative goods. The 
greater the divergence in his estimates of the marginal utili- 
ties of two goods, the more ready is he to trade the lower 
utility for the higher one. Exchange is but the effort to 
adjust goods to wants in the best way. The less useful 
(marginally viewed) is traded for the more useful. The 
greater the difference, in the one trader's judgment, between 
the marginal utilities of the two goods, the greater is the 
maladjustment, and the greater, therefore, is the motive 
to seek readjustment by means of exchange. As the quan- 
tity of the good parted with declines, its marginal utility 
increases; and as more of the other good is acquired, its 
marginal utility declines. The marginal utility of the two 
exchangeable units must come to equilibrium in the indi- 
vidual's judgment. At this point demand ceases, not be- 
cause an additional unit of the one good could afford no 
gratification, but because it would afford less gratification 
than the other good in which demand must be expressed to 
be effectual. 



§11] DESIRE BECOMES DEMAND 29 

4. Demand thus varies at different ratios of exchange The demand 
between goods, and may be expressed graphically by a de- '^^^^ 
mand curve. This would show for any one man the decline 

of the marginal utility of each added portion of a good, and 
these individual demand curves may be united into a de- 
mand curve for a group of men. The demand curve ex- 
presses graphically what a man would be willing to pay at 
each particular stage in the increase of goods. We have here 
come to the very threshold of the subject of markets and ex- 
change. 

5. Elasticity of demand, in the case of any good, ex- Elasticity 
presses the degree in wlrich a change in its ratio to other 

goods will increase the demand. Elasticity varies for dif- 
ferent classes of men according to their w^ealth and to the cost 
of the goods. If strawberries are a dollar a box in the city 
market, a slight fall in the price, say to seventy-five cents, 
will increase the demand but slightly. But if the price is 
fifteen cents and falls to ten, the increase in the demand 
will be marked, for the number of consumers to whom 
a difference of five cents is important is then very great. 
The demand for the staples is comparatively inelastic. A 
certain amount of simple food is necessary to support life; 
an increase in its price will not quickly check the demand. 
On the other hand, if the price of staple foods falls, no very 
great increase will take place in the demand. 



CHAPTER 5 
EXCHANGE IN A MARKET 



Reciprocal 
demand 
becomes ex- 
change 



§ I. EXCHANGE OF GOODS RESULTING FROM DEMAND 

1. Exchange in the usual economic sense is the transfer 
of two goods hy two owners, each of whom deems the good 
taken more than a value-equivalent for the one given. The 
comparison of goods that has been discussed above is a kind 
of exchange. When a person chooses one thing rather than 
another, one form of gratification may be said to be mentally 
exchanged for another. This is exchange in that person's 
mind, or subjective exchange. But the word "exchange" as 
usually employed means an exchange of goods between per- 
sons. It is objective exchange, and when the word is used 
without modification, it is to be understood in the objective 
sense. In the last chapter were analyzed the motives of the 
individual man. Robinson Crusoe on his desert island would 
in very many ways be acted upon by the same motives in 
reference to economic goods that men are in society. Tet, it 
is exchange in society and the complicated problems arising 
from this transfer of goods from person to person that con- 
stitute nearly the whole of the subject-matter of political 
economy. 

Exchange is seen to arise out of the differences in the sit- 
uations of men with reference to goods. The different sub- 
jective valuations give rise to demand, and demand leads to 
exchange. In early societies differences in natural products 
were the most usual causes of exchange. Salt, though so 
essential to life, is found in few places. The metals early be- 

30 



51] EXCHANGE OF GOODS RESULTING FROM DEMAND 31 

came indispensable for weapons of defense or for the chase, 
and were sought far and wide. Rare shells, feathers, jewels, 
and the precious metals appealed in early times to a uni- 
versal desire for ornament. Products like these are the ob- 
jects of a rude sort of exchange in the first simple efforts 
made to adjust possessions to wants. Within the tribe, dif- 
ferences in the skill and ability of men to produce arrow 
heads or weapons or ornaments, bring about the exchange 
of goods. 

2. The advantage of exchange consists in the raising of the Mutual 
want-gratifying power of goods to both parties. It generally advantage 
was assumed by medieval thinkers that if one party to an 
exchange gained, the other must lose. The mistaken idea 
prevailed that value is something fixed in the good, and 
unchangeable. ^Yhere the exchange is voluntary (and only 

that kind is here being considered), it is mutual advantages 
which make the exchange rational. Many false conclusions 
on practical questions still result from a failure to grasp 
this simple truth. It follows from this that the act of 
exchange is itself useful, for goods having a small importance 
to men are given a higher importance by being brought into 
better relations with wants. Merchants, peddlers, traders, 
and common carriers of all sorts, therefore, are adding to 
the utility of goods. This idea has been only slowly ap- 
prehended, but is now one of the least disputed propositions 
in economics. 

3. Barter is the exchange of goods without the iise of Demand is 
money. Either one of the goods traded in cases of barter ^^^^^^^ 
may be considered as sold, and either one as bought, aspect 
according as the matter is looked at from the standpoint of 

the one or the other party to the exchange. Demand, there- 
fore, is supply, and supply is demand when the point of 
view is shifted from one party to another. The fisherman's 
demand for venison is expressed in Icrins of fish; the 
hunter's demand for fish is expressed in terms of venison. 
But to tlie fisherman the venison is the supply ofi'ered to 



32 



EXCHANGE IN A MARKET 



[CH. 5 



him. The term "marginal utility" of a good, therefore, 
does not refer merely to the demand of the consumer; for it 
expresses by a single phrase the idea both of demand and 
of supply. The utility of the goods composing the supply is 
expressed in terms of the goods that represent demand and 
vice versa. The only way in which man can give definite, 
concrete, numerical expression to his desire for goods is to 
state it in terms of other goods. In expressing numerically, 
in terms of other objects, an estimate of the utility of an 
apple, a horse or a house, one inevitably gives expression to a 
ratio of exchange; demand for one good is the offer of an- 
other good. 



§ II. BARTER UNDER SIMPLE CONDITIONS 

In isolated 1. In isolated exchange, where only two traders engage 
thep^c^^s "^ harter, their estimates give respectively the upper and 
noteconom- the lower figures of the ratio at which the trade can take 
^^ "^ ^ place. Let us recall the fact that a difference in the relative 
estimates that men place on goods is the first essential of 
exchange. Those estimates may be expressed in a ratio ; 
we may say that A will give four apples for one orange, 
would be glad to give fewer, but will not give more; while 
B will give one orange for three apples, would be glad to 
get more apples, but will not take fewer. The outside limits 
of the ratio at which the exchange must take place will, there- 
fore, be one orange for three or four apples. 

A, seller of apples, offers 4 (or fewer) apples for 1 orange. 

B, buyer of apples, demands 3 (or more) apples for 1 
orange. 

There is, in entirely isolated exchange, therefore, a lack 
of definiteness in the price, much depending on what Adam 
Smith called the "higgling of the market." In the old-time 
American horse trade much depended on "bluff"; in such 
cases it was as important to be able to judge character as to 
judge horses. A thorough analysis of the trade, however. 



511] BARTER UNDER SIMPLE CONDITIONS 33 

would probably show that the bargain is concluded at a 
point which exactly balances the hopes of gain and fears of 
loss of one of the parties. 

2. Whei-e one-sided competition exists, the ratio of the competitive 
exchange will he somewhere between the estimates of the ^^^^'"^ 

^ ' narrows the 

two buyers most eager for the last portion offered. By com- limitsoi 
petition is here meant the independent seeking of the same ^"^* 
thing at one time by two or more persons. Where there is 
one market price paid by a number of buyers, it may be that 
no two of the subjective estimates are alike; the exchange 
value may differ from all of their estimates, and yet must 
correspond closely to two. Auction sales well illustrate the 
principle. If there is one ax to be sold and ten possible 
buyers for an ax, and there is no combination among them, 
the bidding will go on until the estimate of the buyer next 
to the most eager, has been reached. The most eager buyer 
can then secure the ax by bidding just a little above his 
next competitor. But if there are ten axes and ten buyers 
who know that there will be ten axes offered, the more eager 
buyers will refuse to bid much above the less eager ones. A 
shrewd auctioneer, therefore, often conceals the fact that 
there is more than one of an article, and having sold it off, 
brings out a second or a third one of the same kind, thus 
keeping the buyers in ignorance of the supply and getting 
somewhere near the estimate of the most eager buyer in 
each case. Advertisements of "a limited supply," "the last 
chance," "positively the last appearance," are meant to 
stimulate the demand of the patrons, and to lead them to 
buy at once. In general, therefore, where competition ex- 
ists on one side, price is fixed with greater definiteness than 
in isolated exchange. Not so much depends on shrewd bar- 
gaining, on bluff, or on the stubbornness of an individual. 
Far more depends on forces outside the control of any one 
man. The bidders are impelled by self-interest to outbid 
their competitors, and thus the limits within which the mar- 
ket price must fall are narrowly fixed. 

3 



34 EXCHANGE IN A MARKET [CH. 5 

Buyers fix If things already brought to market must be sold at any 
perishable P^i^c that Can be secured, the buyers may be said to fix the 
goods price. This does not mean that they can buy it for any sum 

that they wish, but it means that when each one is trying to 
get it as cheap as possible, their bids finally determine how 
much it will sell for. In such cases, therefore, the compe- 
tition is for the moment one-sided. 

If a part of the supply can be withdrawn and kept without 
great loss, this will be done if the price is low. Strawberries, 
fish, and meat may be sold Saturday night at any price that 
will secure purchasers, but every thing that can be kept with 
little or no depreciation will be withheld from sale for a time. 
It may even be of advantage to the seller to destroy a part 
of the supply, when the increased price of the smaller 
amount will give a larger total. 
The margin 3. Where two-sided competition exists, the hidding goes 
ofadvan- ^^^ yntil a price is reached where the least eager seller 
marginal and the least eager buyer have the narrowest possible motive 
^^^ to exchange. As the market ratio varies from those in 

' the minds of the individuals when they come to the mar- 
ket, there is left a considerable margin to some and a 
very small one to others. This difference betM-een the mar- 
ket value and the ratio of exchange at which any given in- 
dividual woiild continue to exchange for the good may be 
called the margin of advantage. Moreover, the buyers will 
have a margin and the sellers a mai'gin, and as that margin 
narrows there is less and less motive to continue the ex- 
change until, finally, the margin disappearing, the buyer or 
seller, withdrawing from the market, ceases to be an ex- 
changer, at least for that particular part of the goods. 

The least eager buyer and the least eager seller may be 
called the marginal pair. They are the buyer and the seller 
respectively having the narrowest margin of advantage. 
Their outside estimates are nearest to the market ratio. If 
the market ratio shifts slightly in either direction, one of 
them will drop out of the exchange. It is evident that a buyer 



\ 



§n] 



BARTER UNDER SIMPLE CONDITIONS 



35 



who is taking ten units may be on the margin with reference 
to the tenth unit, and yet may continue to be one of the most 




Un/fj of Good* 



eager buyers to secure one unit. Thus, the marginal buyer 
is to be thought of as that person who, logically considered, 
is the least eager, or on the margin, with reference to a 
particular unit of supply, however eager he may be with 
reference to any other unit of supply. It would be well to 
recall here the discussion of the nature of wants and the 
variation in the intensity of demand. 

4. Market values are huilt up on subjective valuations. 
The idea of market values, therefore, is that of the want-grat- 
ifying power of goods as expressed in terms of other goods, uaiesti 
where there are various buyers and sellers. They are not an °^*^® 
average of the subjective valuations, nor are they made up 
of the extremes. They correspond closely with the sub- 
jective estimates of two of the exchangers. The other parties 
to the exchange are willing to accept the market ratio, for 
it offers them more inducements than it does to either one of 
the marginal pair. 



Market 
values built 
on individ- 



36 



EXCHANGE IN A MARKET 



[CH. 5 



One price in 
a market 

\ 



The earlier 
markets 



§ III. PRICE IN A MARKET 

1, A market is a body of buyers and sellers in such close 
business relations that the actual price conforms closely to 
the valuation of the marginal pair. The word "price" 
which we have used, may be defined as value expressed in 
terms of some commonly exchanged commodity. The term 
is used more broadly of anything given in exchange. The 
very terms of this definition imply that there can be but one 
price in a market. This is a somewhat abstract but a useful 
economic proposition. Very often within sound of each 
other's voices traders are paying different prices for a good. 
On the occasion of a break in the stock-market, excited 
traders within ten feet of each other make bids that differ 
by thousands of dollars. Retail and Avholesale merchants 
may be purchasing goods in the same room at the same time 
at very different prices. But within a group of buyers and 
sellers where competition is approximately complete, price 
is fixed with some degree of exactness. The more nearly 
the actual conditions approach to the ideal of a market, the 
less are prices fixed by higgling, and the more impersonal 
they become, the buyers and sellers being compelled to adjust 
their bids to the needs of the market, and not being able to 
vary them greatly one way or the other. 

2. Markets are steadily widening through the improve- 
ment of means of communication and transportation. 
The earliest markets were established on the borders 
between tribes, villages or nations as a common ground 
where strangers met to trade. At such markets were brought 
together from sparsely settled districts a comparatively 
large number of merchants and customers. Buyers had the 
opportunity of wide selection both in kind and quality, and 
the sellers found a large body of customers gathered at one 
point. Throughout the Middle Ages purchases were made by 
the more prosperous husbandmen in great quantities once a 



§111] PRICE IN A MARKET 37 

year at the fairs or markets. As both the buyers and sellers 
came from widely separated places, there was, in most re- 
spects, no combination, and the conditions of a competitive 
market were present. 

The number of buyers and sellers that can constitute a The growth 
single market is limited both directly and indirectly by the °*™^f'^^ts 
means of transportation. A dense population cannot usually 
be maintained without easy means of transportation to bring 
in a large supply of food, and to carry back manufactured 
goods great distances. The remarkable growth in the means 
of commerce since the application of steam to water traffic, 
and the invention of the railroad, have made it possible for 
goods to be gathered from most distant points. A market 
implies a common understanding among traders. Modern 
means of communication such as newspapers, post-offices, 
telegraph and cable, trade bulletins, commercial travelers, 
the consular service, and many forms of special agencies, 
are diffusing information widely. As a result of these 
changes, there has been a widening of the village-market to 
the markets of the province, of the nation, and finally of the 
world. While a part of every orfe's purchases continues to 
be made in the neighborhood, a greater and greater portion 
of the total business is done by traders who are widely sep- 
arated and who are indeed members of the world market. 
Various articles produced in the same locality may seek dif- "*^ 
ferent markets. The market for wheat may be in Liverpool, 
while that for fruit and eggs is in the village near the farm- 
house. If a given product of any community is sold in dif- 
ferent markets, the net prices secured must be very nearly 
equal. 

3. Normal price is spoken of in contrast to market price Theconcep- 
when the actual market price results from exceptional cir- ^°^^^^^^ 
cumstances a}id prohahly will not he maintained. The term price 
"normal price," much used in economic discussion, is the 
price which, apart from exceptional conditions, is expected to 
prevail, and to which actual prices seem constantly striving 



38 



EXCHANGE IN A MARKET 



(CH. 5 



Review of 
the argu- 
ment 



to adjust themselves. As actual prices are nearly always 
either more or less than so-called normal price, and only 
momentarily ever correspond with it, the term "normal" 
w^ould appear to be something of a misnomer. Moreover, 
as the circumstances of production change, this normal price 
itself is altered so that what is normal one day may be quite 
abnormal the next. The thought of "normal price" is an 
abstract one, but despite the inaptness of the word it is not 
without some practical validity. In determining whether he 
shall continue to produce certain goods, the business man is 
practically guided by his view of normal price. An example 
of departure from normal price as above defined, is found in 
the price of food when an expected ship has failed to ar- 
rive at a port with its cargo of grain. A scarcity amount- 
ing almost to famine might thus exist in a seaboard city, and 
the market price would rise; but as this would be due to an 
accident and would afford a larger gain than usual to those 
who happened to have a supply of grain, men would say 
that the market price ^vas above the normal price. The 
arrival of the expected '^hip would cause the market price 
to return to the normal. 

In review, we see that the market value of goods grows out 
of the different personal estimates made by men. Market 
value itself being a complex and difficult problem, it can 
be mastered only by dividing it. First, therefore, must be 
studied the more general and obvious motives of men, the 
nature of wants and their effects on man's subjective esti- 
mates. The same simple motives that influence the subjective 
valuations made by individual men, may be traced to the 
conditions of the complicated market. It is their workings 
that are seen in the obscurest problems of market price. 



/'/I 



7 



rence of 
wants 



CHAPTER 6 
PSYCHIC INCOME 

§ I. INCOME AS A FLOW OP GOODS 

1. Satisfaction and gratification heing only temporary xherecur- 
conditions, economic wants appear in more or less regtdarly 
recurring series. Impressions are short lived, sensations are 
temporary, wants that have been satisfied recur. Wants recur 

for the same reason that they first arose. No impression on 
the nerves or on the senses is lasting. Man's senses were de- 
veloped for the purpose of bringing him into relation with 
the outer world, of enabling him to survive in his struggle 
with the forces of nature. So,w^hen a good has been enjoyed, 
the utility to that person of that thing or service for that par- 
ticular moment, falls, it may be even to zero. To keep wants 
satisfied is impossible; we cannot do next year's reading or 
next week's eating now; we cannot live the life of to-morrow. 
The best results in reading or eating come from taking the 
right amount day by day. But it is a need in the life of men 
that wants should recur after a time, otherwise there would 
be no motive for action. 

2. The economic ideal is that this series of recurring series of 
vants should he met by a corresponding series of goods. It wants and 

scries of 

is evident that if a series or succession of goods varies, at goods 
different times, moments, and conditions, in its power to grat- 
ify wants, the closer the correspondence between the two 
series, that of wants and that of goods, the greater will be 
the total of gratification. We may liken man's life to a 
journey in which the supplies of food are gotten at the sta- 

39 



40 



PSYCHIC INCOME 



[CH. 



Social and 

private 

incomes 



Money 
income 



tions. If any one of these supplies fails, the traveler suffers 
the pangs of hunger, and if two or three supplies are at one 
point, they do not serve the needs of man so well as if dis- 
tributed along the way. This constant inflow of goods is one 
of the fundamental needs of life. The savage dimly under- 
stands this need. Even the birds and the beasts adjust their 
lives to it either by travel or by toil. The spring and autumn 
migrations to new feeding grounds are the attempts of the 
bird to gratify this series of wants as they arise. The ant, 
the bee, and the squirrel anticipate, and work to fill their 
storehouses against the days of need. 

3. Objective income consists of the additioial sums of 
goods acquired by individuals or by society during the in- 
come period. The term national or social income may be 
contrasted with individual or private income in the objective 
sense. The nature of the acquisition of objective incomes 
may, in some cases, be different if viewed from the social and 
individual standpoints. Society, as a whole, may be said to 
acquire income only when goods are produced ; individuals 
may acquire income by gift, bequest, theft, or other modes of 
transfer from other individuals. In many cases the two 
kinds of income, however, agree, the objective income of so- 
ciety being the algebraic sum of the goods acquired or parted 
with by all the individuals. 

We should not understand that either social or private ob- 
jective incomes include only material goods, for many utili- 
ties and labor services that never take on a material or money 
expression are included in either case. Indeed, we are close 
here to the conception of psychic income which is to be de- 
veloped more fully. 

Income of money is not often the same as income of things. 
Usually many of these subtler utilities are overlooked and 
omitted from the recognized money income. In this day the 
use of money is so common that we are sometimes led to ig- 
nore the value of things to which the money expression is 
not given. The money income is merely the money expres- 



1 

\ 



J I] INCOME AS A FLOW OF GOODS 41 

siou of the value of currently acquired goods, and it is the 
only medium through which such varied sources of gratifica- 
tion can be compared. 

4. Income in the logical sense must be a net addition, but Gross and 
tiic term gross income is not without popular and practical °et income 
meaning. Gross income is sometimes spoken of in the sense 

of total receipts, as the total of goods secured ; net income is 
the remainder after deducting expenditures and after replac- 
ing the goods employed to secure the income. In order to 
produce some goods technically^ men make use of other 
goods. While they are storing up a supply of wood or coal 
it may be looked upon as the income, but they may burn it 
to help grow hothouse plants. While they gather flowers 
with one hand, they destroy fuel with the other. Only the 
net increase in value can be accounted income in the second 
period. The goods that come into a man's possession in any 
period are of many sorts : to get some he has destroyed many 
previously existing goods ; while to get others he has not 
needed to use up the accumulations of the past or to mort- 
gage the future. The one kind is gross, the other net income. 

5. An income of consumption goods is a part of wealth, wealth and 
but not the whole of it. The consumption goods, the "pres- 
ent goods" at the moment available, are the essential part of 
wealth for the moment's enjoyment. The only essential and 
immediate conditions of a series of gratifications is a regular 

series of consumption goods. But many things existing 
which could be used to secure a gratification are not in fact 
treated as consumption goods. A crop of corn is not all in- 
come. In a time of famine it could be used, but seed-corn 
was saved from last year, and some nuist be kept for next 
year. This is a part of wealth, but not of "present goods" 
as we understand the term. 

Further, in the economic world there is much wealth that some goods 
never can gratify any want directly; many forms of wealth ^^^j^^" 
never can be consumption goods. It is true that everything enjoyable 
called wealth is expected to contribute sooner or later in some *°*^* 



42 PSYCHIC INCOME tCH. 6 

way to the sum of gratifications. It is for that reason it is 
called wealth. It is, however, a mere figure of speech to say 
indirect want-gratifiers become want-gratifying goods. For 
example, the engine transporting a load of coal is indirectly 
gratifying wants ; if it is transporting a train-load of pas- 
sengers, the gratification is direct. A machine making cloth 
for next year is gratifying wants only in a metaphorical 
sense. A field used to produce food is not a direct want- 
gratifier until it is transformed into a residence site, a play- 
ground, or a tennis-court. 

It is necessary therefore to recognize the distinction be- 
tween present and future incomes. The value of the mass of 
wealth in possession and yielding income, rests in large part 
upon its power of contributing to income in some future 
period. Thus, any durable good may be looked upon as em- 
bodying a series of incomes ranging from present to future 
in varying degrees. This will be fully considered under the 
subject of capital. 
Income from 6. lucomes are called funded or unfunded according to 
ir^"abof ^^'^ sources from which they are derived. Funded income 
arises from the possession of wealth or of claims on wealth, 
such as lands, railroad stocks, government bonds, etc. The in- 
come is "funded" because it corresponds to an abiding fund 
of wealth. The income arising from current labor is un- 
funded, because there is no permanent fund of accumulated 
wealth corresponding to it. 

The idea of regularity connected with funded income is 
not essential to the idea of income in general, i.e., we cannot 
refuse to call a thing income because it occurs only this year. 
If it is part of the sum of goods that flows in, that is newly 
available for the man's use, it is income. But funded in- 
come is the more abiding, for income from wages stops when 
the man dies or fails to perform his work, while the income 
from wealth continues after he ceases to be active. Thus, 
families with equal incomes may differ greatly in wealth, 
the one depending entirely on salaries, the other on rents. 



\ 



in] ESXOME AS A SERIES OF GRATIFICATIONS 43 



§ II. INCOME AS A SERIES OP GRATIFICATIONS 

1. The value of consumption goods is derived from the Gratifica- 
pleasurahle psijchic impressions which they aid to produce, ^^^^^y^-^^^^ 
and tJiese psychic effects constitute the psychic income. The income 
objective income is sometimes called the "real" income, but 
certainly it is not income in the most essential sense. 
Things outside of men cannot be feelings, they can only call 
out or occasion feeling, and it is the attainment of pleasurable 
conditions in mind or soul that is the aim of all economic ac- 
tivity. Material income and immaterial income are both re- 
lated to and reducible to psychic income. Some portions at 
least of the objective incomes of goods are continually by 
use becoming subjective incomes of enjoyment. Men talk of 
material income as consisting of bushels of wheat, head of 
cattle, etc., and of immaterial income as the uses that durable 
goods yield directly or that men perform for each other, e.g., 
those of the singer, physician, teacher, judge — all services 
that do not take on material form. There was a long-stand- 
ing dispute in economic literature regarding the difference 
between productive and unproductive labor. Productive 
labor was said to be that which embodied itself in abid- 
ing material form. The distinction led to some peculiar 
puzzles and paradoxes. The bartender mixing drinks, adds 
to the value of those ingredients ; in a minute that value is 
dissipated. According to the distinction in question, he is a 
productive laborer because his services are embodied in ma- 
terial form, whereas the lecturer is regarded as an unpro- 
ductive laborer because the results of his labor are not em- 
bodied in material form. But whether or not the service has au sources 
for a moment embodied itself in material form is of no essen- °*g°^°™* 
tial economic import. The presence of the waiter is as essen- ductive 
tial to the well-served dinner as are the polished silver and 
china, or as the well-cooked food. The distinction in question 
is not now made by economists, all labor that contributes to 



44 



PSYCHIC INCOME 



[CH. 6 



All wealth 
is logically 
related to 
psychic 
income 



Values of 
things dis- 
tant in 
time 



value being regarded as productive. But a similar distinc- 
tion is inconsistently preserved by many writers in the case 
of material things. A building used as a factory is called 
productive, but used by the owner as a dwelling it is called 
unproductive because the service it renders does not appear 
in material form. But the use of the house, or that of land 
for a school ground or campus, secures a certain gratifica- 
tion, an immaterial good. Consistency requires that the 
services of men and the use of material things be judged by 
their psychic results, the question whether the service takes 
on a material or an immaterial form being disregarded. 

2. Only those things and actions that are in some causal 
relation to gratifications can have value to man. This propo- 
sition of theory is demonstrated every hour in practical life. 
The business man always is trying to trace a causal relation 
between things that do not and cannot themselves directly 
satisfy wants, and things that do. The vineyard has no 
value to Tantalus, unable to reach its fruit. A captive, 
chained to a rock, attaches value only to the things within 
his reach. Men living in savagery and ignorance starve 
amid the possibilities of plenty. Chained by their ignorance 
and improvidence to a little spot of earth, they do not see 
clearly, either in time or space, the economic relations about 
them. 

3. Man's foresight and knowledge enable him to think of 
many periods at once, and thus his felt dependence on goods 
extends over a series of future productive agents. In order 
to simplify the problem, we have spoken of the economic man 
as living only in and for the moment. If he had no more 
knowledge, memory, or imagination than is necessary to com- 
pare goods here, only present goods could have value to him. 
Even the higher animals, and much more the savages, rise 
above that level of improvidence. With increased intelli- 
gence the economic life of man expands, and he attaches im- 
portance to things which at the present moment have not, 
and cannot have, the slightest influence on his immediate 



§11] INCOME AS A SERIES OF GRATIFICATIONS 45 

gratification. The extension of man's view works a momen- 
tous change in his economic estimates. Of the thousands of 
forms of matter in the world, only a comparatively few ever 
will make an immediate gratifying impression on man's 
senses. But many of them are so connected in his thought 
by chains of association with pleasures or uses, that almost 
instinctively and most intensely he attaches an importance 
to them. In most cases it would require close thought to see 
that the service attributed directly to them was but a re- 
flection of that performed by some other good. Thus, more 
and more, the estimates placed by men on goods come to de- 
pend on knowledge and foresight, and not on immediate im- 
pressions and feelings. 

4. Things arc causally related in varying degrees to the Goods 
psycliic income, and have value only as their relation is va^fng^g. 
known and felt. The explanation of value is not complete greesto 
till value has been traced back to its source in gratification. ^^^^^ 
Often the complex nature of the problem is ignored. If one 
discusses the trading of a bushel of grain, to be used by a 
hungry man for food, for a sheep to be kept for breeding, or 
for wool to be made into cloth next year, he may overlook the 
difference in the grade of wants compared. In this case, a 
gratification of the present moment is compared with a 
gratification of a very different kind at a future time. The 
problem involved is complex because of differences in time, 
in place, and in the nature of the want-gratifiers. The student 
should endeavor to reduce the problem of value to its sim- 
l)lest form by considering first the exchange, at the present 
moment, of immediately enjoyable goods. The logical start- 
ing-point in the theory of value is in those goods that are in 
closest touch with feeling, and on this basis may be built up 
an explanation of values in which reason and forethought 
have a greater part. Starting from the proposition that 
l)sychic income is the foundation of all values, we shall go 
on, however, to trace causes that give value to all the physi- 
cal agents, and to the most indirect of want-gratifiers. 



DIVISION B— WEALTH AND RENT 

CHAPTER 7 
WEALTH AND ITS INDIRECT USES 



Technical 
rank of 
agents 



Time rela- 
tions of 
goods to 
wants 



§ I. THE GRADES OP RELATION OF INDIRECT GOODS TO 

GRATIFICATION 

1. Goods may he ranked according to their technical re- 
lation to wants. The technical rank of goods (sometimes 
spoken of as the degree of roimdaboutness of the process) 
signifies the number of steps or processes that intervene be- 
tween the agent used and the desired form. If one wishing 
the hickory-nut hanging above his head must first pick up 
a stick to throw at it, the nut is removed one step from de- 
sire. But even among savages the processes are much more 
complicated. The Indian with a crude knife fashions his 
bow and arrow, fastens the flint and cord which represent 
still other processes of industry, and shoots the bird which 
satisfies his hunger. In modern conditions the relations are 
vastly more complicated ; only at the end of a long series do 
men arrive at the thing which gratifies their wants. 

2. Goods may he ranked hy their relation to wants in 
time. The relation in respect to time is measured by the 
period that must elapse before the utility of an agent results 
in, is converted into, gratification. No agent or influence 
intervening, a thing may yet be removed a long way from 

46 



§11 INDIRECT GOODS AND GRATIFICATION 47 

gratification. A tree may not be fitted to bear fruit for ten 
years to come. Meantime, there are many other possible uses 
for the tree : it may be used for fuel, or to make a canoe with 
which to catch fish, or to follow some other indirect method 
of production. Evidently the technical and time relations of 
goods are very different. The number of steps has no neces- 
sary relation to the time. A number of technical steps may 
be taken in half an hour, or a process of a single technical 
step may last a year. In the mechanic arts the technical re- 
lations are of primary significance, but in economics the 
time relations are mainly to be considered. 

3. Economic goods may he classified as immediately en- 
joyable goods and durable agents. Enjoyable goods are 
goods in a final form, producing gratification or just ready 
to give gratification the next moment, as the cool draft of 
air made by a fan on a hot day, the cup of coffee steaming 
on the table. 

Many goods of just the same fi;rm as the foregoing may not Enjoyable 
be affording current gratification (except that afforded by g°°^^and 
thrift and forethought) , but are kept because later they will agents 
gratify a more intense want or gratify a want better. Apples 
and potatoes are kept in a cellar so that their use is dis- 
tributed throughout the winter; cider and wine are kept till 
they get a quality that appeals more to the palate. Coal, 
wood, and stocks of goods, are thus kept in the form of en- 
joyable goods, destined to be physically destroyed when at 
length they yield a gratification. Evidently they must be 
storing up meantime a certain additional utility, for other- 
wise there would be no reason why they should be kept for 
the future. Such goods as these are sometimes called un- 
ripened consumption goods, but until ripened they bear in 
part the character of durable agents. 

Abiding sources of economic enjoyments are called durable 
agents. The inhabited house is a source of continued grati- 
fication in each moment's shelter it affords; but, further, it is 
the durable source of a series of future uses, as yet un- 



48 



WEALTH AND ITS INDIRECT USES 



tCH. 7 



Degrees of 
durableness 



ripened. The hammer, the hoe, the tree, the field may all 
be considered as agents to secure consumption goods. Some 
of these are but one step removed from direct gratification, 
as the hoe helping the gardener to get food for his own use. 
Other agents are bound by many technical links to the ulti- 
mate gratification. 

4. This classification of goods is ahstract, in that it is a 
classifi.cation, not of concrete goods, hut of qualities shared 
in some degree hy nearly all goods. Most goods unite in 
some degree both characters, but in varying measure. This 
is, therefore, a continuity classification, the varying classes 
of goods grading from those whose durableness is zero (just 
at the moment of consumption) to those most durable, which 
yield an endless series of uses or products. Yet the classifica- 
tion is practical, corresponding as it does with thoughts 
which men have in the use of goods. By repairs and other 
methods goods become, and are looked upon as, durable 
sources of a series of uses. 

It is to be noted further that the enjoyable goods pass 
over into psychic income, that is, they are the stream of 
objective utilities that is each moment detaching itself as 
income from the great mass of wealth. The durable goods 
are those utilities which for the time remain, not yet ri- 
pened or ready to be converted into psychic income. 



Income as 
affected by 
climatic 
conditions 



§ II. CONDITIONS OF ECONOMIC WEALTH 

1. Tlte bounty and variety of the natural supply of in- 
direct goods in the material ivorld are the prime conditions 
of a bountiful income to society. The effect of climate on the 
supply of goods available for man is complex. Climate is 
itself a direct source of gratification. As temperature must 
be adjusted to man's need, climate satisfies wants directly. 
Health, energy, the beauty of noonday woods and of sunlit 
clouds are conditioned on the favor of nature. Climate af- 
fects, further, the supply of material economic goods. All 



§11] CONDITIONS OF ECONOMIC WEALTH 49 

the earlier civilizations arose in warmer countries. But, 
after man had gained a certain mastery over the obstacles of 
nature, he was able to soften the harsher features of climate, 
and with better shelter and clothing, with better stocks of 
winter food and fuel, the more favorable features of the 
temperate zone could be utilized. So civilization moved 
northward from Egypt and India to Greece and Rome, to 
northern Europe and America. 

Soil conditions for vegetable life determine first the By natural 
amount and kind of animal life. Animal life from one point ^^s°"'^<^^3 
of view is a parasite, living on the vegetable ; it is only the 
vegetable that has power to assimilate most inorganic com- 
pounds. Water being a need of plant life, the amount of 
rainfall is one of the most important conditions of indust'V. 
Man, therefore, depends on the resources of the soil directly 
or indirectly; a fertile soil furnishes him either directly a 
supply of vegetable food, or indirectly a supply of animal 
food. 

Natural supplies of metals, of coal, and of timber are im- 
portant consumption goods, but they are also indirectly the 
condition for a vast variety of other goods. The industry 
that could exist without iron, copper, and coal would be of 
a very low grade. 

The variety of flora and fauna, and their fitness for man's Byfloraand 
needs, largely condition the possible production. If, in the 
course of evolution, it had chanced that wheat and corn, the 
horse and the cow, had been crowded out in the struggle for 
existence, we should have had a very different civilization. 
The possibilities of civilization in Peru, and those of all the 
Indians on the American continent, were limited for lack of 
domestic animals. Animals that are fit for domestication are 
a necessary intermediate agent by aid of which man can ap- 
propriate and turn to his use the fertile qualities of the soil. 

Not content with the material world about him, even when 
it is at its best, man alters it in many ways. He enriches the 
soil, improves the varieties of animals, he even in some 



50 



WEALTH AND ITS INDIRECT USES 



[CH. 7 



By motion 
and energy 



By food, 
animals, 
and fuel 



slight degree affects the climate, and by the use of a multi- 
tude of artificial bits of matter called tools, works profound 
changes in the world in which he lives. 

2. A large part of the utility of goods is conditioned on 
motion and energy. It has been said that man's power in 
production is limited to moving things. The outer world is 
to man the sole source of motive forces. He can bring things 
together and they produce the result. Further, it may be 
said that nearly every kind of utility is conditioned on mo- 
tion. It is man's aim to secure a constant inflow of goods. 
To secure this either he must move to get the goods, or he 
must cause goods to move toward him. 

The law of "conservation of energy" helps to explain 
economic action ; the supply of energy in the universe cannot 
be increased or diminished, but may take on new forms. So 
a limited supply in man's control may take on various forms 
and so have different effects on gratifications. One and the 
same source of energy may be converted into the different 
forms of heat, light, motion, electricity, etc. But there must 
be some source. Man's desire is directed to getting force 
at the right place and in the right degree. If light or heat 
is too intense, it causes pain ; the glare of the sun blinds 
instead of giving keener vision. A moderate force applied 
to any of the senses gives the maximum clearness or pleasure. 
Man is constantly endeavoring to secure forces from the 
outer world and to adjust motion so that it will directly or 
indirectly best serve his purposes. 

3. Among the main sources of power used hy men are 
food, domestic animals, and fuel. In eating food man stores 
up force in his own body. When he draws the bow he puts 
force into it to lie latent until liberated at the right moment. 
There must be a source of energy likewise that mental action 
may go on, and the power of sunbeams, stored for a time in 
food, is liberated in the processes of thought. 

This first natural mode of liberating energy within their 
own bodies does not satisfy the growing needs and aims of 



§11] CONDITIONS OF ECONOMIC WEALTH 51 

men. Such a mode is "labor," which becomes at times pain- 
ful and distasteful. In the earliest societies known, some 
sorts of domestic animals are found supplementing man's 
efforts and acting upon the material world to alter it for 
man. The dog joining in the chase guards his master's 
safety, and helps to bear his burdens. The draft-beast in the 
field turns the heavy soil, and aids in the final harvest. The 
trained elephant does the work of twenty men piling logs, 
loading ships, or carrying burdens. 

Man further increases his control over the material world 
by making other men do his bidding. Domestic slavery, 
where wife or child serves the father of the family, or chattel 
slavery, where the vanquished toils for the victor, are all 
but universal in early communities. Such a method of in- 
creasing one's control over the forces of the world requires 
only superior strength, no special intelligence in mechanics, 
and is thus one of the first crude devices in a primitive civili- 
zation. 

Fuel has been, up to the present time, perhaps the most 
important source of energy. Fire in the hands of savage 
man gave him dominion over the forests and over the metals. 
In this age of steam the liberation of the energy of the sun, 
stored up in coal in ages past, is still the indispensable con- 
dition of our developed industry. 

4. The greatest and most exJiaustless reservoirs of power By the 
for man's use are in wind and water. While the supply of energy m 

' . . ^^ '' wind and 

fuel is being used at a progressive rate and will soon ap- flowing 
proach exhaustion, there are elsewhere exhaustless stores of ^^*^'' 
energy awaiting man's command. To make use of the wind 
for sailing a boat, only the simplest arrangements are 
needed; a windmill fixed at one place requires more in- 
genuity and machinery. The energy of the wind is derived 
from the sun and will last until the sun loses its heat. If 
some means can be found for equalizing the flow and for stor- 
ing the power of the wind, it may yet become a great agency 
of industry. The force of falling water, long used in a petty 



52 



WEALTH AND ITS INDIRECT USES 



[CH. 7 



By the 
intelligent 
utilization 
of all these 
agencies 



way by the old water-mills, is just beginning to be employed 
on a large scale at such points as Niagara. Where fuel is 
high, as on the Pacific coast, wave motors have been success- 
fully used in a small way, but wave motion is too irregular 
to serve well the needs for power. But the constant motion 
of the tides offers, at some favored points, a source of power 
that will remain as long as the earth revolves upon its axis. 

5. Man studies and conipares the durable goods that give 
liim command over enjoyahle goods, and attaches value to 
til em. Thus energy is found dissipating itself throughout 
the world in ways useless to man, and in places where it can- 
not serve his purposes. As man grows in power of control 
over nature, he seeks to apply these forces in forms and at 
places he has selected. If he can arm himself with the ener- 
gies of mine and torrent, he can react with giant strength on 
the material world. He ceases to accept passively its condi- 
tions, and to live on its grudging gifts; he becomes its fash- 
ioner, in a sense its creator. His intelligence and his wants 
are most important factors determining what the form of the 
physical world about him shall be. 

But all the efforts of men in the most developed economy 
cannot make to disappear the differences in the quality of 
goods and agents. Desirable goods to consume are limited 
in quantity, and they vary in quality ; hence they have value 
and some higher than others. Likewise, durable material 
agents and sources of power are limited in number and vary 
in convenience of location and efficiency. As men seek to 
gratify their desires, they attach importance to these agents 
of power. Each is valued for its service or its series of ser- 
vices. When anything is seen to contain a series of uses, it 
becomes a rent-bearer, ^nd the economic problem of rent 
arises, one step more complex than, the problem of valuing 
simple consumption goods. 



CHAPTER 8 
THE RENTING CONTRACT 

§ I, NATURE AND DEFINITION OF RENT 

1. The temporary use of materials and power and their Temporary 
sources is necessary to bring most enjoyable goods into ^^^^^^ 
being. Indirect goods have value solely because they help to possession 
get direct goods. The apple-tree is valued because it bears °^^sents 
fruit, and the orchard because the trees give promise of 
yielding a succession of crops for years to come. There are 

thus two problems of value in connection with durable 
goods: that of the value of a temporary use for a brief 
period, as for a year ; and that of the value of a thing itself, 
the use-bearer, for a long series of years or in perpetuity. 
To explain what fixes the value of the temporary use is the 
problem of rent ; to explain what determines the value of 
long-continued use or of permanent control and ownership 
of a use-bearer is the problem of capitalization. 

2. The term rent is used in a number of senses, icIiicJi onginofthe 
must be carefully distinguislied. The original meaning of t^'^™'^^^^ 
rent was any regular income or revenue arising from wealth. 

The woi'd cohk^s from the low Latin roita from renda, in 
turn from reddiius, that which is given, yielded or given 
back, or rendila, that which is g^en or returned. The 
French rendre (English render), to give or return that 
which belongs to one, is used very early. Chaucer used 
" rente " as an income. " Cattle had he enough and rente," 
cattle probably meaning property (chattels), and rente in- 
come. Rental is a collective term for a number of rents. 

53 



54 



THE RENTING CONTRACT 



[CH. 8 



Popular and 
special 
meaning of 
rent 



The total yield of an estate was called its rental or rent-roll, 
and a list of the various sources of income, including all 
payments from tenants in money, produce or services, consti- 
tuted its rental. 

3. The popular meaning of rerit is the amount paid for 
the use of material things which must he returned to the 
owners after the time of use agreed upon. We speak of the 
rent of a house, boat, etc., using the word as a synonym for 
hire. In the European languages the word is used more fre- 
quently in that sense. In the French la rente means the 
income from any kind of property; but corporate se- 
curities and national bonds came particularly to be called 
les rentes, because they are a form of investment yielding 
a permanent income. The one who has a perpetual income 
from bonds or rents is called a rentier. In German the term 
Rente is used more broadly than in English, as an income 
of any sort, Grimdrente meaning the rent of land, and Capi- 
talrente the income usually in England called interest. 

A restricted meaning has long been applied by economists 
to the word : the income yielded by lands, etc. This was put 
in contrast with interest for money and capital, and with 
wages of labor. This meaning is now being abandoned by 
economic students. 

A wider meaning recently given to the word by many 
economists turns on the supposed relation of some portions 
of price to cost of production. Thus, frequent use is made of 
the expressions: consumer's rent, producer's rent, buyer's 
rent, seller's rent, etc. In the well-founded opinion of some 
recent critics this usage rests on a mistaken reasoning. How- 
ever, in the midst of this wide variety of usage the student 
must be forewarned and alert. Doubtless agreement will at 
length be arrived at. Meantime, no economist can dictate 
what meaning is to be attached to the term, but one may 
suggest the definition that seems to him most expedient. 
Throughout this work we shall endeavor to use the term rent 
uniformly and consistently as it is now to be defined. 



51] NATURE AND DEFINITION OF RENT 55 

4. The essential thought in rent, as we shall use it, is that The essence 
it is the value of the usufruct as distinguished from the value °*''®°* 

of the use-bearer or thing itself. The meaning of usufruct 
is the use of the fruits, or in legal phrase: "the right of 
using and enjoying the income of an estate or other thing 
belonging to another, without impairing the substance." 
The obvious fact is that fruits can be eaten without destroy- 
ing the tree, the harvest gathered without destroying the 
field. By a metaphor the word in legal discussion is applied 
to the use of any product, and we shall employ it, as in 
common speech, in reference to one's own goods as well as to 
the goods of another. 

The qualities whose use gives value are not usually inde- Rented 
structible, but they are treated as undestroyed. There is a f^l^®"* 
famous phrase used by Ricardo, "rent is paid for the origi- as durable 
nal and indestructible qualities of the soil." He said "in- 
destructible," but the word is not apt. There are many 
(|ualities in the fertile field that must be destroyed when it 
is used. Every economist since Ricardo 's time has recog- 
nized this, and many excuses for the inaccuracy have been 
given. After every harvest, the field is less serviceable than 
before, and if it is to be of the same grade of efficiency, the 
fertile elements must be restored. We cannot assert that 
Ricardo meant undestroyed, for he was not quite clear on the 
question. But it is evident that one can count as true in- v 
come only that part of the value of product that remains 
after full repairs have been made. It is only by a fiction 
that most indirect agents can be regarded as indestructible. 
Things yielding rent are not indestructible, but generally 
they are preserved undestroyed. 

5. A distinction must he made between gross and net, or xmerenta 
true and false rent. Before the usufruct is estimated, al- "^t'^'^o™® 
lowance must be made for repairs, depreciation, and for va- 
rious expenses which absorb a good portion of the gross 
product. When this allowance has been made, the income 

may be considered as a net sum not due to the sale, or to 



56 THE EENTING CONTRACT [CH. 8 

the using up of any part of the thing rented. This is the 
essential thought in typical rent— that it is the value of the 
surplus, or net product, of an economic agent leaving the 
agent itself unimpaired in efficiency. The total product is 
sometimes called the "gross rent," but economic rent is 
"net rent." This thought is made clearer by the following 
discussion. 



§ II. THE HISTORY OP CONTRACT RENT AND CHANGES IN IT 

Economic 1. Economic rent (likewise called natural, competitive, 

and contract ^.^^^ sometimes rack rent) is to he distinguished from con- 
rent distin- _ ^ ' 

guished tract rent. Economic rent is the market value of the usu- 
fruct, and contract rent is the amount a man pays for the 
use of wealth by virtue of an existing agreement. The one 
is impersonal or economic; the other is personal or legal, 
being fixed by agreements between persons. The rents usu- 
ally spoken of are contract rents. 

The two diverge more or less. If the contract has been 
lately made the two will be nearly the same. Contracts of 
long standing often bind the tenant or borrower to pay either 
more or less than the present competitive price. If, after 
a time, the value of the use is greater than the contract rent, 
the tenant is fortunate in having his lease. But he is the 
loser if he is bound by lease or agreement to pay rent in a 
locality where land has become less valuable. 

Economic and contract rent usually diverge also because 
of the agreement that the owner, or lender, keep up the re- 
pairs and pay the taxes. Here it is simply the difference be- 
tween gross and net rent. 

Custom may prevent the owner from charging all the usu- 
fruct of the agent is worth. If the contract rent is less than 
the economic rent, evidently the borrower enjoys a part of 
the usufruct, without charge, and to that degree is in the 
position of an owner. The usufruct in this case is divided 
between the two parties. Such instances were numerous in 



OF CONTRACT RENT AND CHANGES IN IT 57 

the Middle Ages in the renting of land, and still are found 
in many countries. 

Contract rent is based on economic rent and tends to 
conform to it whenever there is competition. The exis- 
tence of economic rent is the basis of the agreement to pay 
contract rent. Prospective hirers of agents forecast what 
the use will be worth to them and make their bids accord- 
ingly. 

2. The renting contract is the agreement of a Ijorrowcr to The renting 
pay for the use of a thing and, at the end of the time, to re- theuseV"^ 
store it in good condition or pay for its complete repair. In wealth 
practical business it is necessary to have definite agreements 

to prevent disputes. Some provide that one party, some 
that the other party, shall keep up repairs. The form of the 
renting contract is observed by men in estimating the uses 
of their own wealth where no contract exists. If they count 
the gross product of an agent as rent, it is bad bookkeeping. 
In many cases it is necessary, therefore, to follow the form 
of the renting contract in order to determine the net yield 
of indirect goods. 

3. In early stages of industry the use of nearly all wealth The renting 
is estimated under the renting contract. In the lower stages ^^g^^^^^Je 
of culture, in hunting, fishing, or nomadic pastoral tribes, Ages 
land is not recognized as wealth to be exchanged or owned. 

But at a later stage, as in the Middle Ages in Europe, land 
and the things pertaining to it, as ditches, houses, mills, cat- 
tle, stock, and the few simple implements, constituted the 
larger portion of the wealth. Land was granted to the 
tenant or serf in return for services. The contract was 
pretty strictly drawn and all items were specified. It was 
not hard to hold the tenant to his contract to keep the laud 
in about the same condition. There was a certain rotation of 
crops; the tenant was obliged to keep his stock up to stan- 
dard ; and, moreover, he had a certain interest in the land 
because his contract rent (as explained above) was less than 
the economic rent. The landlord, therefore, could count 



58 THE RENTING CONTRACT [CH. 8 

pretty surely on the undiminished power of his land and 
stock from one year to another. 

At that time, truck and barter were the common modes of 
exchange, and rents were paid in products and services, not 
in money. The fruits of the soil were consumed on the spot 
instead of being sold as now. Land was rarely, if ever, sold 
outright, so that there was no occasion to estimate its total 
selling value. It was thought of as a place on which to live 
and as a source of livelihood. Its yearly use was all that 
was subject to contract, sale, and exchange. Not the land 
itself but a reiit charge on the land was sold, the term rent 
charge meaning an annual sum payable out of the yield of 
an estate. Many medieval estates were so tied up by legal 
conditions that they could not be sold outright; all 
that the owner could do was to sell or mortgage the annual 
rental. Thus, in the Middle Ages, it was all but universal to 
look upon most indirect agents as exchangeable only under 
the renting contract, as subject to renting but not to com- 
plete transfer and sale. 
The renting 4. As industry developed, the renting contract remained 
contract not (ji^jiQgf wholly Confined to cases of renting lands and houses. 

convenient ^ ' ' ^ 

iBcommerce The materials and appliances needed for manufacture and 
commerce are so manifold and varying in quality that the 
rent- form of contract is very cumbersome and difficult for 
exchangers to enforce. If a merchant about to embark on 
a trading journey wished to rent a ship and a stock of goods, 
the renting contract became most difficult to interpret. He 
must agree to repay the loan in goods of the same kind and 
(piality as those received, a contract most difficult to execute, 
and giving occasion to costly tests and countless disagree- 
ments. It was much easier for the merchant to get his loan 
under the interest contract, i.e., a money loan, with which 
to buy the goods. With the growth of industry and com- 
merce, wealth increased in towns, taking many forms, as 
those of ships, wagons, tools, and stocks of goods, that could 
not conveniently be rented. 

In England, the country which developed its industrial 



^11] HISTORY OF CONTRACT RENT AND CHANGES IN IT 59 

system earliest, the idea of reut, therefore, gradually be- The thought 
came disassociated almost entirely from the use or hire of gssockted"* 
any wealth but land and real property. Because in the Mid- with a rural 
die Ages rent was associated almost entirely with natural re- ^*^°°°'°y 
sources, they being the only important forms of wealth which 
men rented from others, there was fostered the idea that the 
essential mark of rent is the connection with natural re- 
sources. It is a simple example of the association of ideas. 
In the transfer or loan of movable goods, the rent contract 
was quite overshadowed by the other form of contract, that 
of a money loan. According to this explanation the essential 
and primary difference between renting wealth and borrow- 
ing money at interest is not in the kind of wealth whose use 
is thus temporarily transferred, but in the nature of the 
contract. But as forms of wealth differ in their fitness for 
transfer under the two forms of contract, there goes on a 
competition between them, as a result of which each becomes 
associated with certain groups of goods. In the Middle 
Ages the renting contract was the dominant form, but it has 
been progressively displaced by loans in the money form, and 
its importance is still declining. 

5, The main forms of wealth whose usufruct is still sold Renting 
under long renting contracts are land and its more durable most used 
improvements. In England farms are let under long leases, a with land 
very common form being the thirty-year lease. Under the 
old, almost fixed, conditions in agriculture such a lease was 
equitable, but when prices are rapidly changing and when 
new methods are being introduced, it gives rise to great hard- 
ships. About twenty-five years ago, the great fall in the 
price of agricultural products brought ruin to many of the 
tenant farmers. The land troubles in Ireland have been 
largely about tenants' improvements. When the lease ex- 
pired, the landlord could appropriate all the improvements 
that the tenant had made. In America farms are let usually 
on shares, and from year to year, but the plan of a money 
rent is increasingly followed. The difficulty of getting an 
equitable arrangement between landlord and tenant is reeog- 



60 



THE RENTING CONTRACT 



[CH. 8 



But many 
other goods 
aie rented 



Economic 
rent much 
wider than 
the renting 
contract 



nized by all. The landlord must make the proper repairs or 
see that they are made ; he must specify in the contract whe- 
ther the products can be taken away or are to be fed on the 
place so that the soil may not be impoverished, and he must 
provide for the purchase of other fertilizers. On the other 
hand, the tenant under the renting contract has little motive 
for improvement, and many occasions for discontent. So in 
America, far more than in the older countries, land changes 
hands by sale, the purchaser going into debt for it, giv- 
ing his note and paying interest on the loan rather than rent 
for the farm. 

Many less durable goods are rented for brief periods. Car- 
riages are rented for the day, bicycles by the week or month. 
Sewing-machines, boats, guns, tents, and even diamond en- 
gagement rings, yield their joys under the renting contract. 
People frequently hesitate between the renting and the pur- 
chase of a piano, and in some cases renting is the more con- 
venient and desirable way of securing its use. The purchase 
of a dress-coat or of a masquerade-suit to be worn but once, 
involves for some an excessive and needless sacrifice. For 
a moderate sum its temporary use may be had, and it is 
then returned, little the worse for wear, to the accommo- 
dating clothier. 

A final word of caution may be given. Economic rent is 
not confined to the cases of contract rent. It exists in every 
case where a more or less durable agent yields a use that is 
scarce and desirable. The owner who uses a thing himself 
gets the advantage in the product as clearly as if he collected 
rent from a borrower. Houses lived in by the owners, house 
furnishings, clothing, books, all scarce and durable agents, 
are yielding rents in this logical sense. To the economist, 
therefore, the problem of economic rent, as one of the grand 
divisions of the problem of value, remains of undiminished 
importance, for in these unceasing streams of uses emanating 
from our enviromnent, is found the basis for the value of all 
durable wealth. 



CHAPTER 9 
THE LAW OF DIMINISHING RETURNS 

§ I. DEFINITION OF THE CONCEPT OF (ECONOMIC) 
DIMINISHING RETURNS 

1. The phrase "diminishing returns of industrial agents" Economic 
is the expression of the fact that there is an elastic limit to agents con- 

... .... tain uses to 

the utility any indirect good can afford within a given time, be obtained 
Successive attempts to get additional services from a thing o^^iywith 

, progressive 

are usually in part successful, but each additional service is difficulty 
gained with more difficulty, or a smaller added service is 
gained for an equal expenditure of materials or effort. 
A book stands many hours untouched on the shelves of the 
library; but if, as often happens, two or more persons wish 
to use it at the same hour, time and energy are wasted. The 
book has a potential use during the twenty-four hours, but 
all this can be secured only at the cost of the greatest incon- 
venience. The greatest net uses, therefore, are seen to be to 
the first user and in the first hour, for these uses cost the least 
limp and trouble. If the members of a family will take 
turns, one chair will serve for all of them; but if all are to 
be able to sit down together, a chair must be provided for 
each. Often it will happen that only one chair is in use, the 
other nine chairs being valued only for their potential uses. 
I knew two young men who owned a dress-coat in partner- 
ship, and as they had different evenings free from business 
all went well until both were invited to a reception which 
both were very eagei" to attend. 

Illustrations of this principle may be drawn from every 

61 



62 



THE LAW OF DIMINISHING RETURNS 



[CH. 9 



This is true 
of all classes 
of agents 



Decreasing 
technical 
effective- 
ness of 
material 
things 



class of durable goods. The example generally given is that 
of a field used for agriculture. It was long ago seen that 
a larger crop could usually be obtained on the same area, 
only with greater effort or expenditure; but this fact has 
been thought to be peculiar to the use of land. The examples 
given above have been purposely chosen from very different 
fields, to show that the truth is a general one : a good that 
affords a given service can be made to increase that service, 
ordinarily, only on condition that men put forth greater 
effort, or sacrifice more goods. 

. The decreased utility is most clearly seen in the diminished 
effect which other agents produce when used in connection 
with the thing. When several are trying to use the same 
book, and are wasting time trying to get it, we often say their 
study hours are less fruitful because of the poor library fa- 
cilities. Again, we speak either of the diminished returns of 
the field, or of the labor applied to the field. Either the 
particular thing is said to show diminished returns or the 
other cooperating agents are said to show them, 

2. As the agents used in connection with a -fixed amount 
of any other agent {for mechanical, chemical, physiological, 
psychological, and other purposes) increase, their objective 
effectiveness after a given point decreases. Objective or 
technical effectiveness means effectiveness independent of 
the thought or estimate of men. It is not the effectiveness to 
produce a feeling in men, but to produce results on the ma- 
terial world. In a mechanism, if one part is increased with- 
out increasing the other parts, a point is reached where it 
does not add to the result. If in the building of a bridge the 
weight of the floor is increased beyond a certain point, the 
rest of the bridge being left unchanged, the bridge is weak- 
ened instead of strengthened. If the weight of the iron in 
the framework is increased beyond a certain point without 
strengthening the piers, the structure is weakened. If the 
pier is greatly enlarged, the bridge may not be weakened, 
but there is an utter waste of material and effort, and per- 



§1] DEFINITION OF THE CONCEPT 63 

haps the main purpose of the bridge is defeated by the 
damming up of the stream. A bicycle frame, like a chain, is 
no stronger than its weakest part. If the strength of all 
parts of the wheel and frame is in equal proportion to the 
strain they must bear, added weight to any single part 
weakens the whole machine. The development of the mod- 
ern type of bicycle, by many experiments, is a good exam- 
ple of the adjustment of materials according to the principle 
of technical efficiency, 

A variation of the same principle is seen in chemical com- 
binations. Exact proportions of materials must be used to 
get a certain result. Increase of one ingredient will not in- 
crease the desired product. Either the added part is rejected, 
does not enter at all into the compound, or it unites to form 
another and different product. 

That the same principle holds good of the psychological 
effects of things, we have already fully recognized in discuss- 
ing wants and marginal utility. A given amount of a good 
will aft'ect the senses in a pleasurable way, but an increase in 
the amount will not cause a proportional addition to plea- 
sure of sight, sound, or smell. On the contrary, such an in- 
crease may defeat the object entirely. Here we are at the 
threshold of the economic problem, for we have touched on 
"feeling." 

3. The idea of economic diminishing returns arises when Economic 
rnan recognizes these technical facts and their relation to reuims^re-^ 
gratification, in his use of a limited supply of indirect agents, late to value 
All economy begins with scarcity. The varying effects pro- 
duced by different agents therefore require to be studied or 
the sum of direct goods of enjoyment will not be as great 
as is possible. Waste will take place. A bridge will have 
its maximiim use with a minimum outlay when the parts are 
in a certain proportion. Beyond that point, the increase of 
any part may add something to the usefulness of the bi'idge, 
])\it the agents must be taken from some other and greater 
use. 



64 



THE LAW OF DIMINISHING RETURNS 



[OH. 9 



The thought of economic diminishing returns always has 
reference to value. If a particular kind and amount of a 
certain material is used in varying combinations with other 
agents, the value of the added product will not always be 
in the same proportion to the value of the added agent. 
The bridge-builder must consider not only what the added 
material will add to strength, but what it will cost, and whe- 
ther the result will justify this expense. So the economic 
problem of diminishing returns is more complicated than 
the mechanical one, for it contains not only the technical but 
other factors. 
The mar- If the value of the product increases less rapidly than the 

ginaiutiuty ^^^^ ^f ^Y\e agents successively added to secure it, a point 

in goods 

must at length be reached where the value of the added 
agents and of the additional product just balance; this is 
called the point of marginal utility. 

If a certain value in labor, fertilizer, or material, be ap- 
plied to an acre of land, it may be more than recovered in the 
value of the product. Further applications give a product 
increased not in equal proportion to the former yield, and so 
on till the value of the last-added agent just balances that of 
the added product. This is the best adjustment possible, and 
beyond this point there will be a deficit in value. Just where 
the equilibrium is found at any time is the margin of cultiva- 
tion. 

The term "cultivation" is taken from agriculture but 
must be understood in the broader sense of utilization, as the 
principle is not confined to the case of land or agriculture, 
but applies as well to the use of furniture, books, clothing, 
horses, or any other indirect agents. 

4. There are two margins, the intensive and the ex- 
tensive. The margin of utilization in the case of a single 
piece of wealth is called the intensive margin. Any form of 
indirect wealth, anything kept to use, may be considered as 
containing a series of uses. Using one thing more and more 
while uniting other things with it, is using it more intensively. 



Meaning of 
intensive 
margin of 
utilization 



§1] 



DEFINITION OF THE CONCEPT 



65 



Getting more use out of the book by effort, out of the farm Theexten- 
by applying more fertilizer, out of the house by putting more ^^^^J^^ 
people into it, is intensive utilization. The earlier uses come tion 
easily, naturally; the later ones are gotten with increasing 
difficulty. 

When a number of agents are of different qualities, the 
point between the one last used and the next unused is the 
extensive margin of utilization. The best agents that are 
available are naturally used first, but as they are more in- 
tensively used there is increasing inconvenience. Then re- 
course must be made to the inferior agents, whose first uses, 
however, are greater than the later, intensive uses, of the 
better grades. When the step is made to the use of agents 
that were before unused because inferior, it is extending the 
margin of utilization. The intensive margin of use is in the 
particular thing ; the extensive margin of use lies outside of 
this. 

M 



<0 


O 




4) 


b 


m 


^ 


c 




N 






d 




d 




c? 


e 


e 









H 


-f 


f 




^ 




P 




4) 


9 


9 

A 


9 




9 




C 
-S 


h 


A, 
/ 


h 




Q 






i 


/ 


i 




/ 





Extensive Grades of Uses 



The relation of the two margins may be shown in a simple 
diagram. Let the better grades of indirect agents be repre- 
sented by longer rectangles, the upper parts of which repre- 
sent the more accessible, more easily secured utilities. Each 
agent consists of many strata of uses. The best uses are 
grades a, b, and c, in M ; but after M has been utilii-ed iu- 

5 



66 



THE LAW OF DIMINISHING RETURNS 



[ClI. 9 



Equilibrium 
of the two 
margins 



tensively down to d, N will begin to be utilized at its highest 
point. When utilization goes down to f, comes into use, 
and so on. Therefore it will be seen that until the intensive 
margin takes in d, M is on the extreme margin of utilization, 
and N is just outside it ; when the intensive margin falls to 
g and h, P is inside the extensive margin, and Q is just out- 
side. 

The marginal utility or effectiveness of added agents tends 
to be equal on the intensive and the extensive margins. This 
is simply a case of the substitution of goods in the use of in- 
direct agents. If the value of the added product in the use 
of a particular good decreases, a point finally is reached 
where it is better to transfer the outlay to another agent, to 
change from intensive to extensive utilization, to go over to 
the use of another field or of another machine not so good. 
The effectiveness of the labor or capital that men have to 
apply is being compared constantly in the two cases, and to 
the extent that this comparison is perfect the effectiveness of 
the agents tends to be equal on the margin in the two appli- 
cations. 



11. OTHER MEANINGS OF THE PHRASE 

RETURNS ' ' 



DIMINISHING 



Does not 
mean de- 
clining 
prosperity 



Nor exhaus- 
tion of the 
soil 



1. The phrase diminishing returns is sometimes taken as 
meaning merely a decrease in prosperity. Many ideas are 
connected with this phrase. It is not self-explanatory. It 
suggests various thoughts according to context and these 
have not failed to give rise to different uses. The student 
must be cautious if he is to think clearly about it. If popu- 
lation declines, or industry changes from one place to an- 
other, or from one kind of goods to another, it is sometimes 
said that returns are diminishing in the deserted district. 

2. A more common misuse of the term is to apply it to 
the exhaustion of the soil. If the soil of a district has been 
robbed of its fertile qualities and smaller crops are raised 



§11] OTHER MEANINGS OF "DIMINISHING RETURNS" 67 

than before, tliis term is employed ; likewise it is in the case 
of the increased difficulty in the extraction of natural stores 
in mining. The veins near the surface being mined first, 
later the galleries must be cut deeper and greater expense in- 
curred to get the stores. But the conditions here are 
very different from those we have considered under dimin- 
ishing returns. INIines are used not under the renting con- 
tract, but under the royalty contract, which permits and 
contemplates a progressive using up of the limited stores of 
natural resources. 

3. Manufactures are often said to show increasing returns Fallacious 
ni contrast with agriculture as an industry of decreasing tweenman- 
returns. There is here an inconsistent shifting of thought, ufacture 
Agriculture is thought of as limited to a certain area of aLjcuUure 
ground, whereon evidently diminishing returns will take 
place. But the fixed limit of ground-space is not thought 
of in connection with manufactures. Taking the same view 
of manufactures, commerce, education, etc., that is, assum- 
ing each industry to be confined to limited area of ground, 
each is seen to be subject to diminishing returns. Some 
ground-space is one of the essentials to carry on any business. 
If the attempt is made to accumulate a large library in one 
small room, a point is reached where much energy is wasted 
in trying to find the books. In a university the psychical 
product, education, may be limited by the need of space. 
The school-room, laboratory, or college class-room could be 
used at midnight, it is true, but not conveniently; and as 
students increase, buildings must be added. The same is 
true of any industry. We cannot conveniently increase the 
business of a lumber-yard without a larger yard-space, or of 
a factory without a larger floor-space. But the added space 
may be gotten by spreading horizontally or piling up per- 
pendicularly. A ten-story building on an acre lot repre- 
sents ten acres of floor-space. Putting up higher buildings 
is an expansion in area by the more intensive utilization of 
the land. Devices like elevators, and more compact appli- 



68 



THE LAW OF DIMINISHING RETURNS 



[CH. 9 



All indus- 
tries if 
limited as to 
one factor, 
as area, 
show di- 
minishing 
returns 



Confused 
with the 
question of 
large 
production 



Technical 
confused 
with his- 
torical di- 
minishing 
returns 



ances, make possible an increasing business in manufacture, 
trade, or commerce upon the same area of land. All indus- 
tries, if looked at consistently from this standpoint, are sub- 
ject to the same condition, though it is true this will make 
itself felt in varying degrees in different lines of industry. 
In agriculture some similar devices are possible by the use 
of greenhouses, but it is true that in it, on account of the need 
of sun, light, and air, the limits of space are more quickly 
felt, and are less elastic than in most other industries. The 
difference, however, is one of degree, and not of kind. Higher 
factories, larger stores, enable manufacturers to adapt them- 
selves to the law as applied to the surface of land, but not 
to escape its operations. Neither the law of gravitation nor 
the law of diminishing returns is violated or broken when 
materials are lifted to build the upper stories. Both "laws" 
are at work, even when the building is rising from the 
ground. Men are merely adapting their conduct to the con- 
ditions imposed by gravitation and diminishing returns. 

Manufactures usually are thought of as enlarging by in- 
crease of the amount of capital employed, without limita- 
tion as to the area covered. But even here a limit is reached 
in the amount of capital that can be employed at any 
one location because of the difficulty of widening the market. 
The question, however, is one of the advantages of large pro- 
duction with large capital, not of the increasing use of a 
limited area of land. If manufactures and agriculture are 
to be compared with reference to their economic nature, it 
is essential to clear thinking that both be looked at with ref- 
erence to the same conditions, and from the same point of 
view. 

4. Technical diniinisJiing returns are often confused with 
historical diminishing returns. The prmciple of technical 
diminishing returns is that at any given moment the uses 
obtainable from any indirect agent cannot be indefinitely 
increased without increasing difficulty. Historical dimin- 
ishing returns occur when, in fact, human effort is less boun- 



§111] 



DEVELOPMENT OF THE CONCEPT 



69 



tifiilly rewarded in a later period than in an earlier one. If 
to-day a day's labor in agriculture produced less than fifty 
years ago, historical diminishing returns would have oc- 
curred. In fact, labor is more bountifully rewarded in agri- 
culture than fifty years ago, yet it is true to-day that there 
are few fields or appliances which, if used more intensively 
with the prevailing prices of labor and material, would not 
show a diminishing return to the additional capital applied. 
Therefore, in the historical sense, increasing returns have 
prevailed, yet at every moment it has been necessary to apply 
resources under the guidance of the principle of diminishing 
returns. 



§ III. DEVELOPMENT OF THE CONCEPT OF DIMINISHING 

RETURNS 

1. The law of "diminishing returns" was first recognized Recognition 
and expressed with reference to the use of land in aqricul- o^ '^''""iish- 

^ ing returns 

ture. There are several evident reasons why this occurred, to land 
It is obvious to every farmer and gardener that he cannot 
indefinitely increase his crop, that two men cannot always 
produce twice as much as one man, and that in general the 
product does not always vary in proportion to the labor and 
materials applied. Moreover, the food supply is a funda- 
mental factor in industry and in the welfare of states. The 
limit to the supply of food on a given area, cultivated by a 
given method, early appeared and became a serious practi- 
cal problem. 

The circumstances in Europe in the eighteenth century 
drew attention to the subject. Population was increasing, 
and the pressure for food was strong. While all the forms of 
industry most common in cities were increasing, and the 
wealth of the cities was growing, poverty was increasing 
among the peasantry. Especially was this true in England 
during the Napoleonic wars, 1798-1815, owing to exceptional 
conditions. The food-supply from abroad was cut off, and 



70 



THE LAW OF DIMINISHING RETURNS 



[CH. 9 



This con- 
fused with 
historical 
diminishing 
returns 



The prin- 
ciple applies 
to land in 
all of its 
uses 



And to all 

indirect 

agents 



when the English farmers, tempted by the high prices, took 
poorer land into cultivation, and sought to get larger crops 
from their older fields, a great object-lesson was presented on 
the principle of diminishing returns in agriculture. 

2. TJiis truth of diminishing returns in agriculture was 
confused with the thought of historical diminishing returns. 
Circumstances of the time led to the belief that because 
of lack of food misery must continue among the masses of 
men. It was thought inevitable that the population would 
continue to increase and food become more scarce. The idea 
of diminishing returns became thus a prophecy of what 
would happen, a social philosophy, that affected the thought 
of men on every practical social question. 

3. The application of the principle of diminishing returns 
ivas soon broadened to include land in other than agricul- 
tural nses. This was a natural and inevitable extension of 
the thought. It was evident that an unlimited use could not 
be made of a limited area of land, in any industry whatever. 
There is no explanation of rent of business sites, residences, 
lots, wharves, waterfalls, etc., unless account is taken of 
diminishing returns. If it were possible to do an unlimited 
amount of business upon a limited area of land, it would 
never get more scarce and could never rise in value. The 
idea of diminishing returns came properly, therefore, to be 
applied to land in all its uses. It is true, however, that the 
relatively large areas needed in agriculture make the phe- 
nomenon of diminishing returns much more striking in it 
than in most other industries. 

4. "Diminishing returns" should he broadly applied 
to all wealth having indirect uses. The argument for this 
view may take both a negative and a positive form. Why 
should we say that the principle applies to land and not to 
cases of other industrial agents? Why in the case of a 
waterfall and not in the case of the water-wheel ? Why in 
the case of the field and not in the case of the trees in the 



§111] DEVELOPMENT OF THE CONCEPT 71 

field ? Are they not all scarce and desirable goods yielding 
a limited supply of uses? 

Positively it can be argued that the concept of diminishing 
returns is indispensable to a reasonable explanation of the 
value of an}' indirect agents. Anything that could afford an 
infinite series of uses at once would be an infinite supply, if 
an infinite number of uses could be gotten out of one hammer 
in all places at once, it would pound all the nails in the 
world.- One wagon, one acre of land, one ax, one book of 
each kind, would serve for all men, and duplicates would be 
valueless. But in the case of every material thing there is 
a limit of convenient and economic use. 

5, Diminishing returns of indirect agents is a special case Diminishing 
of the universal laiv of the diminishing utility of goods. '^^^"™f. 

rciflxCu to 

Diminishing returns have to do with indirect goods, while diminishing 
diminishing gratification has to do with direct or consump- s^^^'^'^'^'o" 
tion goods. They are two species or aspects of the same gen- 
eral principle. If the supply of certain indirect agents is 
increased, thereby increasing consumption goods, the utility 
of the indirect agents per unit diminishes. In such a case 
a diminishing return is the reflection, back to the indirect 
good, of the diminishing utility of the direct goods it helps to 
secure. Any indirect agent, added to a fixed amount of other 
ag 3nts with which it is technically used, is credited with a 
diminished utility, just as an additional supply of enjoyable 
goods, coming to meet a fixed demand, falls in value. 

The concept of technical diminishing returns has refer- 
ence to a limited period of time. Though a definite agent 
may have bound up in it a long series of uses, these cannot 
be secured at the moment. If a rent-bearer, such as a fruit- 
tree, were permanent, and men could wait through eternity 
for its yield, they would get an infinite yield of fruit. But 
in any finite period, there can be only a limited yield. 

The concept of diminishing returns is one aspect of the 
great economic law of proportionality, that is, it is one ex- 



law of 
economics 



72 THE LAW OF DIMINISHING RETURNS [CH. 9 

The basal pression of the fundamental, axiomatic truth, that there is 
a best or proper adjustment of means and ends. It is, there- 
fore, the central and essential thought in political economy. 
On it depend all important conclusions with reference to the 
value of indirect goods. Out of it grow the important eco- 
nomic theories of rent and capitalization. 



CHAPTER 10 

THE THEORY OF RENT: THE MARKET VALUE 
OF THE USUFRUCT 

§ I. DIFFERENTIAL ADVANTAGES IN CONSUMPTION GOODS 

1. Both rent and the value of durable wealth are based connection 
on the value of the fruits or products yielded by the wealth. ^^^^^ 
Gratification, afforded directly or indirectly, is the basis of tion, rents, 
all values. The relation of most kinds of wealth to wants is ^g^J^"^ °* 
indirect ; but gratification thus aft'orded indirectly is none 

the less the basis on which the usufruct of wealth is esti- 
mated. Men find the logical or causal connection between 
direct goods, or final product, and indirect goods, or agents. 

To explain the value of the durable wealth, or rent-bearer, 
a still farther step in thought must be taken. The value of 
the rent-bearer is based on the series of rents which it af- 
fords. To explain how these rents are added to give the 
value of the indirect agents is the task of a theory of capitali- 
zation. This being the relation, a change in the value of the 
product changes the rent, and this in turn changes the value 
of the rent-bearer. The theory of rent, therefore, has to 
begin with a review of the valuation of enjoyable goods. 

2. In a group of consumption goods, all of the same qual- Effect of 
ity, the marginal utility declines as the quantity increases. ®^^.!^^°° 
If the quantity of an article capable of ministering to man's uniform 
wants is very limited, its value is high. If the supply of ^°^^ 
something of uniform quality, for which there is no sub- 
stitute, is scanty, the value is estimated without reference 

to any other grade. If a fishing tribe caught very few fish, 

73 



74 



THE THEORY OF RENT 



[CH. 10 



Relation of 
different 
grades of 
consump- 
tion goods 



but these were all equally good, and if no other food were to 
be had, fish would have a high ratio of exchange with every 
other kind of goods. 

If the quantity increases, the value of each unit of the 
whole supply falls, as the importance attributed to its parts 
declines. If an Indian hunting-party met with unusual suc- 
cess, the value of buffalo meat declined. If there is a re- 
markable potato crop, potatoes fall in value. 

3. In a series of consumption goods of different qualities, 
the lower grades acquire value only as scarcity increases in 
the higher grades. If difference in quality between two 
grades of apples is marked and there is a superabundant sup- 
ply of the best grade, no importance is attached to the 
poorer. But if the better grade becomes scarce, the appetite 
for the poorer grade increases, and finally it, too, will be 
consumed. In some years the small, knotty apples are al- 
lowed to rot on the ground; in other years they are 
gathered and are sold at good prices. But if there is an 
abrupt difference in quality, and hence in the marginal util- 
ity of the two grades, the value of the better goods may rise 
considerably before there is any recourse to the poorer. If 
the differences in quality are very slight, the presence of the 
lower grades has the effect of limiting the increase of value 
of the higher grades. Practically in almost all kinds of 
goods there are gradations in quality. Complete uniformity 
is of the rarest occurrence. When did one ever see a basket 
of peaches that were all of the same size, ripeness, color, 
flavor, and perfection? If the step from the higher to the 
lower grade is very slight, resort is immediately made to the 
next lower grade, some of which is substituted for the 
higher. 

There is an independent reason for the value of each grade 
of goods; each grade would have value if there were none 
of the other, but they mutually affect each other's value 
when they exist, side by side, in the same market. The mar- 
ginal utility of each is lessened by the presence of the other. 



§11] DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 75 



And thus, two or ten grades constitute for many purposes a 
single supply as they shade into each other or are merged 
by substitution. 







/ 2 J •*• 

Grades of Consumption Goods by QualiTy 

4. Goods of the lowest grades, having no marginal utility, Free goods 
are free goods. This is a simple truth, but it has important ^a^^n ^f 
bearings. There may be said to be an "extensive margin of utiuzatiou 
utilization" of many consumption goods. The poorer grades 
of apples, rotting on the ground, the multitudes of waste 
things not valued, are on the margin of utilization. When 
a lower grade is used, the margin is extended. The value of 
goods is measured upward from the margin of utilization, 
but this is simply to say that their value is measured from 
zero upward. 

Likewise, there is an intensive marginal utility in con- 
sumption goods. As the better grade of apples becomes more 
scarce, they will be used more sparingly and kept to satisfy 
only the intenser wants. The superiority of some consump- 
tion goods, either in quantity or quality, often is exactly 
analogous to the "differential advantage" spoken of by 
economists in the case of productive agents. The differential 
advantage of the highest grade over the grade of free goods, 
whose value is zero, evidently is the whole value of the high- 
est grade. 

§ II. DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 

1. Rent varies with, the quality of the products yielded 
hy agents, other things being equal. Let us take first a 



76 



THE THEORY OF RENT 



[CH. 10 



Differential 
advantage 
of agents in 
the quality 
of their 
products 



The lower 
grade lim- 
its the value 
of the higher 
grade 



simple case where the agent is the sole condition of the prod- 
uct. If there is but one tree bearing a certain luscious fruit, 
or but one spring yielding a mineral water, the rent of the 
tree or spring being equal to the value of the products 
must vary as the quality of the products varies. If two or 
more trees are standing side by side, they will be compared 
with regard to the difference in the quality of their fruits. 
If two fields differ in quality, greater importance will be at- 
tached to the field capable of producing the better grade or 
variety of fruit or product. A peculiar mineral quality in 
the soil may impart to wine a choice flavor that can at once 
be recognized by experts ; while other fields, distant but a 
few rods, cannot by any effort be made to produce wine of 
the same rare quality. There is said to be a marked difference 
in the success of vineyards lying only a short distance apart 
on the shores of the larger lakes of New York. Nearness to 
the water moderates the temperature, often prevents frosts, 
and hence insures the ripening and quality of the fruit. In 
the Santa Clara valley, as in other parts of California, there 
is a frostless belt, sharply marked off from the lands where 
it is unsafe to attempt to cultivate the delicate orange-tree 
and other semi-tropical plants. In manifold ways differences 
in geological formation affect the use of land and the suc- 
cess of many industries. On one side of a little creek is lime- 
stone land, on the other shale, the limestone producing a 
crop larger and of better quality. When the peculiar nature 
of the one field is found to be the cause of the exceptional 
quality of its fruits, the difference in value is attributed 
to it. 

If there is but one grade of agent, it is, of course, valued 
without reference to any lower grade. The effect of the 
presence of lower grades of agents is to lower the value of 
the higher, inasmuch as the lower grades are substituted for 
the higher. There may be at first enough of the higher grade 
of agents to produce all the fruit wanted of the better qual- 
ity. If, then, there is an increasing demand, and the addi- 



MI] DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 77 

tional yield can be secured only with greater effort, the value 
of the product will rise. The presence of poorer grades, how- 
ever, checks that rise, because use can be shifted to them. 
The value of grade one is not high because grades two, three, 
and four, which are worse than it, are available, but because 
they are not of better quality than they are. Poor as they 
are, their presence reduces somewhat the intensity of demand 
for the best grade. Indirect agents, therefore, are seen to be 
subject to just the same comparisons, substitutions, and esti- 
mates, when their value is considered, as are direct consump- 
tion goods, 

2. The rents of two agents differ as do the quantities of Differential 
goods yielded hy them, other things being equal. In the ^^a^^ts^jn 
case just considered, the quantity remained the same while theamoum 
the quality differed ; now is to be considered the case where Lo^ucts 
the quantity differs while the quality ren^ains the same. It 
is possible that one grade of agents is "poorer" because it 
produces less fruit, not fruit of poorer quality. Consider 
first the static problem. If both agents yield fruits ex- 
actly alike, the value of equal units at the same place and 
time must be equal, and the usufructs would vary in just 
proportion with the quantity of product. Now consider the 
dynamic problem. If the desire for that fruit increases, 
rent would grow as scarcity became more felt. The agents 
yielding, under the prevailing conditions, the largest product. 




A BCD 

Gndes of Agents by amount of Product of Uniform Quality 

would first bo used; later, the poorer agents. The possibility 
of resorting to the poorer agents would keep the better from 
rising so high. 



78 



THE THEORY OF RENT 



[CH. 10 



Comple- 
mentary 
agents unite 
to form a 
product 



Comple- 
mentary 
agents used 
intensively 
show di- 
minishing 
returns 



3. When two agents are necessary to secure a prod- 
uct, the value attributed to each is influenced hy competing 
uses. The thought of one agent independently producing a 
certain product is far too simple to correspond with reality. 
Two or more agents unite to produce a single product, and 
each agent at the same time can be used for acquiring other 
products. Complex as the problem appears, it is solved ac- 
cording to the principle of marginal utility at every moment 
in every market. The different uses, figuratively speaking, 
bid for an agent, and thus its marginal utility is determined 
just as is the price of a good by the bidding of buyers. In- 
deed, it is the bidding of buyers, indirectly. The more ur- 
gent the use, the higher the bid. The felt importance is re- 
flected from the consumption goods that are sought, to the 
agent that will aid to get them. Two or more agents that are 
mutually needed for the acquiring of a product are comple- 
mentary goods. A complementary agent may be either other 
material agents or labor. 

When labor is applied to an agent, either to improve the 
quality or to increase the quantity, it is subject to the law of 
diminishing returns. In the effort to increase the quantity 
of products, labor is applied first more intensively to the 
better agents. If it meets with resistance, if returns dimin- 
ish, it is transferred to any of the poorer agents that have 
in them uses of as high grade as those still in the better agent. 
The superior eft'ectiveness of the earlier over the later units 
of the added agent is called the "differential advantage" of 
the two fixed agents. The result of a day's labor applied 
to a field may be represented by 100, a second day's labor by 
90 (it being only ninety per cent, as effectual), a third day's 
labor by 75 ; but it is more usual to say that the first field 
produces 10 more than the second and 25 more than the 
third, the second 15 more than the third. To the agent 
fixed in supply is attributed the difference in the effective- 
ness of the agent that is applied. 

4. The marginal uses of indirect goods are free uses. 



sWI] DIFFERENTIAL ADVANTAGES IN INDIRECT GOODS 70 



Here again is noted the close parallelism in the process of 
evaluating direct and indirect goods. There is an extensive 
margin in the use of an indirect agent, a point in the grada- 
tion from the better to the poorer agents where the materials 
and forces are left unused and have no value. Land beyond 
that point is free. Outworn goods in manifold forms, old 
pictures, old machines, having no longer charms even for a 
rummage sale, form a no-rent margin of wealth. On every 
hand a great multitude of things unused and worthless differ 
by only a shade from things that still are used and valued. 
Every rubbish-heap, rag-bag, junk-shop, and garret contains 
things once prized, now lingering on the margin of utiliza- 
tion. 

There is also in agents an intensive margin, beyond which 
are certain unexploited uses in the things that we already 
have. This is a more subtle thought, but it has been already 
discussed in connection with diminishing returns. These 
potential uses in agents, uses which in the existing conditions 
lie outside the margin of utilization, of course have no 
value. We have noted that there is an equilibrium between 
these two margins. Rent is measured from a zero point of 
utility either in a good, or in other poorer grades of goods. 

A corollary of this proposition is that there is a limit to 
the rental that anything can yield under any given condi- 
tion. Below the present margin of utility of any goods 
there exist great quantities of free goods, unused goods, or 
unexploited uses. It is only uses above this margin that 
yield rent. Rent is the difference between the value of the 
better grades and the value of the free goods. It is there- 
fore due to the limitation in the supply of indirect agents 
of the better quality, or to the scarcity of the more effective 
uses in those agents. 

5. Rent may he redefined as the value of the scarce uses 
of wealth within a given period. Rent is the felt importance 
of the usufructs of agents in securing gratification. It is 
measured by the marginal utility of any particular grade 



The renUess 
extensive 
margin 
of agents 



Restate- 
ment of 
rent, eco- 
nomic and 
contract 



80 



THE THEORY OF RENT 



[CH. 10 



Economic 
rent is 
primary 



of agents in securing products. These definitions and the 
discussion throughout this chapter applies to economic rather 
than to contract rent. In fixing and agreeing on contract 
rent, men are seeking to estimate the importance of indirect 
goods, the importance that an agent will have in getting a 
product. They are bidding for the use of things, and what 
they bid is contract rent. Contract rent is based on the 
existence of economic rent. Economic rent does not depend 
on contract rent, but on the differences in the effectiveness 
of agents to secure a given product. If there were not dif- 
ferences in the product, and no limits to the supply of in- 
direct agents, rent could not exist ; it would be inconceivable. 
But these differences existing, economic rent inevitably 
arises, for men cannot keep from attaching value to the 
things that aft'ect their desires. Contract rent in turn ap- 
pears wherever the use of wealth becomes an object of ex- 
change and agreement between men in a free society. 



economic 
agents 



CHAPTER 11 

REPAIR, DEPRECIATION, AND DESTRUCTION OF 
WEALTH : RELATION TO ITS SALE AND RENT 

§ I. REPAIR OF RENT-BEARING AGENTS 

1. The continued rent of indirect agents is dependent on Theneces- 
the continual repair of certain parts necessary for their ^^^g^^' 
efficiency. All earthly things wear out or decay. When- nearly aii 
ever man's hand is withheld, nature takes possession of his 
work, regardless of his purposes. Dust gathers on unused 
clothes, and moths burrow in them. Shut up a house, and 
windows are shattered, roofs leak, and vermin swarm. To 
close a factory is to hasten the time when buildings and ma- 
chinery will be piled upon the rubbish heap. The most mag- 
nificent and solid works of man have crumbled under the 
finger of time. The earth is strewn with ruins of gigantic 
engineering works, aqueducts, canals, temples, and monu- 
ments, whose restoration would be no less a task than was 
their first building. Everywhere vigilance and repairs are 
the conditions of continued uses of wealth. Some works of 
nature, such as waterfalls, may appear to have a continued 
use without repair, but they bear rent only when used with 
other things that must be constantly mended. A certain 
amount of labor on the banks of the mill-stream, and certain 
repairs on the dam, the water-wheel, and the gates are neces- 
sary. By a fiction in business contracts the waterfall may 
be dealt with apart from those conditions to its use, and may 
be rented, as a field is, with the agreement that the tenant 
keep up the repairs. 

e 81 



82 



REPAIR AND DEPRECIATION OF WEALTH 



[CH. 11 



The fertile 
lands of 
large re- 
gions have 
lost their 
usefulness 



Wearing out 
of some 
American 
lands 



The efficiency of land as mere standing-room usually does 
not seem to be dependent on repairs. But here again the 
land yields rent in connection with other rent-bearing agents 
(such as houses and other agents above ground), which must 
be repaired. Standing-room on land is not a complete indi- 
rect agent ; it is but one of the conditions for carrying on 
an industry, and even it often requires repairs to make it 
usable. Ranging from these extreme cases of stableness and 
durability, indirect agents vary to the extremes of fragility 
and ephemeralness. 

2. Most of the qualities that contribute to make land fer- 
tile in agriculture being destructible, the constant repair of 
tilled land is necessary to its continued fertility. If any 
things could be said to be indestructible, they would be some 
of the works of nature. In a sense, all matter is indestructible. 
Man cannot annihilate it, he can simply change its condition. 
But in economic discussion it is the value of things that is 
being considered, and from this point of view everything is 
in some degree destructible. The effects of bad husbandry 
are everywhere apparent, and in many regions fertile fields 
have been physically and economically destroyed. In Asia, 
lands that once supported millions, perhaps hundreds of 
millions, of population are now deserts. Egypt, for a time 
reduced to a semi-desert condition, has only in the past 
century been restored to a certain extent by the use of new 
methods and a return to the old ones. Many of the areas 
that were the granaries of Rome can now hardly support a 
sparse, half-starving population. The lands, or at any rate, 
the elements that gave them value, have been destroyed. 

Even in young America may be seen the effect of a failure 
to keep land in repair. As the new rich lands of the West 
were opened up, the old lands in the East were allowed to 
wear out, and many of them were abandoned. On the new 
lands in turn the same methods were followed, using up the 
first rich store of fertility with no attempt to keep up the 
quality of the soil. This may have been the best policy for 



^l] REPAIR OF RENT-BEARING AGENTS 83 

the time; it would not have been economical to employ Old 
World methods of intensive husbandry when such rich ex- 
tensive areas were being opened up. But the process was 
one destructive of natural resources. As settlement moved 
westward, great forests fell in ashes, and the soil was robbed 
of the fertile elements which it had taken centuries for na- 
ture to store up. 

3. The machinery and appliances used in transportalion weanngout 
and manufacturing are all perishable in varying degrees, ofther^i*^ 
Take as an example the great agency for transportation, the road 
railway. The roadbed, which is but the natural soil ex- 
cavated or filled to a better grade, is the most permanent 
part ; yet every frost weakens, every rain undermines, a por- 
tion of it. Earthquake, landslide, and tlood fill up the 
ditches, or tear down the embankments. Constant work is 
needed to keep it fit and safe for use. Above this is the 
track, slightly less permanent, more frequently changed. 
The ties rot, and even the rails of steel must be at times re- 
placed. The rolling-stock is still less durable, and the differ- 
ent parts vary in length of life. It is said that the wheel- 
tires are renewed four times, the boiler three times, and the 
paint seven times, before a locomotive is entirely worn out. 
The oil used in the wheel, which is a necessary part of the 
running machine, has to be applied every day. 

There is a great difference in the length of life of manu- Depreciation 
facturing appliances. The building is fairly durable; yet "f™*""- 
an average depreciation-rate of one and one half per cent, appliances 
a year must be allowed to oft'set a reduction in its value 
of over fifty per cent, in thirty years. Machinery differs 
greatly in durability; well-made, substantial machinery de- 
preciates about five per cent, yearly. The engines and boil- 
ers depreciate more rapidly than the running gear ; the loose 
tools have to be replaced every second to fourth year ; while 
the materials consumed in the industry must be repaired and 
replaced at every repetition of the process of manufacture. 
If a factory is to be maintained in its efficiency in accordance 



84 REPAIR AND DEPRECIATION OF WEALTH [CH. il 

with the terms of the renting contract, and is to continue its 
renting power, everything about it must be from time to 
time repaired and replaced. 
Neglect of 4. Ncglect or postponement of repairs must cause a 

repairsoften falling off of the rent-earning power. The neglect of repairs 
effects may have different results in the factory. The neglect of 

one kind simply reduces present rental while not preventing 
the future restoration of the plant to its full efficiency. If 
certain necessary tools wear out and are not replaced, the 
factory as a whole will be less efficient. Each part of the 
entire outfit being needed in due proportion, the loss in rental 
will correspond not merely to the lost efficiency of the miss- 
ing tools, but to the crippled efficiency of the remaining ap- 
pliances. Failure to apply seed to the land causes the land 
as a whole to be useless for that year's crop. In other cases, 
neglect of repairs increases the expenses of repairs and cuts 
olf future rental. The adages, "A stitch in time saves nine," 
and "An ounce of prevention is worth a pound of cure," 
must be acted upon in every industry. The neglect to repair 
a roof causes damage to an amount many times the cost of a 
new roof. Failure to replace a bolt costing five cents may 
result in the rack and ruin of a machine worth many dollars. 
A handful of earth on a dike may save a whole country 
from destruction. 
But some- Neglect of repairs may be economical, however, when outer 
times is conditions have first reduced the demand for the agent and 

economical 

consequently the rental. When the line of travel changes, 
it does not pay to keep an old hotel up to the same state of 
repair as when it had a great patronage. Old factories some- 
times may better be allowed to depreciate while the price of 
repairs is invested in more prosperous industries. In a de- 
clining neighborhood the houses fall into decay, the owners 
seeing that "it would not pay" to keep them up. 



UI] DEPRECIATION OF AGENTS KEPT IN REPAIR 85 



§ II. DEPRECIATION IN RENT-EARNING POWER OF AGENTS 

KEPT IN REPAIR 

1. Even where repairs are thoroughly kept up and pres- Repairs can 

ent rent is undiminished, future rents may he decreasing p°event^^^ 

because of natural decay. Changes go on in the substance ultimate de- 



cay of 

agents 



of things which cannot be prevented by any attention to 
repairs. The wood in a framework will decay, the metals 
crystallize. There is also an unpreventable wear of parts that 
cannot be replaced without replacing the whole machine. It 
is the aim of the modern manufacturers to make machines 
like the wonderful one-horse shay, every part of equal dura- 
bility. The development in America of the system of "in- 
terchangable parts" has greatly simplified and cheapened 
repairs, and has lengthened the working life of machines ; 
nevertheless their lot is the scrap-heap at last. This general 
depreciation appears to be nearly avoided in large factories 
where there is serial replacement of the parts, but occasion- 
ally some invention or some improvement of process necessi- 
tates an almost completely new equipment. An old man once 
said to me: "I have lived in this house forty years; it was 
well built, has been repainted regularly, has never been al- 
lowed to leak a drop, and it is as good as it ever was. I see 
no reason why it could not be kept to eternity if always 
kept in repair." But the same could not be said of the 
house now. In general, there is finally a termination of the 
rent-earning power of wealth, and the whole has to be re- 
placed. 

2. A change in inventions and processes may reduce the Technical 
rent of agents, independently of their material condition. ^^^°^^^^j^ 
Rent is dependent on the indirect relation of things to wants ; uses of 
that relation may be changed if some other agent is found ^sents 
fitted to serve these wants more directly. Not only do the 
materials of houses change, but fashion and engineering skill 
change, making the old mansions cheerless and inconvenient, 



86 



EEPAIR AND DEPRECIATION OF WEALTH 



[CH. 11 



Industrial 
circum- 
stances 
affect the 
uses of 
agents 



and affecting their rent-earning power. At every moment, 
in a progressive society, many rent-earning agents are being 
thrown out of use. The machinery in flour-mills has been 
almost completely changed, parts of it repeatedly, while 
the roller process has been substituted for the old millstones. 
Water-power, because of its uncertainty, has been replaced 
in many places by steam-power, and in many places steam- 
power in turn has been rivaled by water-power since the 
improvements in the generation and transmission of elec- 
tricity. A change in the process of making paper threw out 
of use much machinery that was only in part saved by its 
removal and adaptation to the making of coarser grades of 
paper. Many minor inventions in the iron industry, still 
more the invention of the Bessemer process, threw out of 
use great numbers of the old appliances, 

3. A change in the outer conditions that give occasion to 
the use of agents may cause depreciation. The exhaustion 
of materials on which machinery is employed may reduce its 
usefulness. A sawmill located in the midst of a forest has 
a high-earning power while the forest lasts, but when the 
forest is cut off the mill itself declines in value. Unless it 
can be removed to another forest and thus have its earning 
power renewed, it will have the value only of scrap-iron ; it 
has become an indirect agent in the wrong place. Oil-boring 
machinery where a rich supply of oil is found has a high 
rental for a time, but when the oil-fields give out the ma- 
chinery falls in value, being worth more or less than the 
cost of transporting it according as the next oil-field is near 
or far. Changes in fashions, calling for different kinds of 
products, cause a depreciation in the value of the old agents. 
Coarse salt, evaporated by the sun, was used by our fathers, 
but the finer product of the steam process is driving out the 
product of the old solar plants. As homespun went out of 
use, much machinery still in good physical condition was cast 
aside. Changes in transportation work revolutions in Indus- 
trial methods. Many prosperous small forges on the country 



t III] DESTRUCTION OF NATURAL STORES OF MATERIALS 87 

roads of Pennsylvania became valueless after the building 
of the railroads. New forges were built at favored points 
where materials and products could be shipped by rail. 

4. The agents employed in any industry range from the Various 
more efficient, high rent, down to the less efficient, low rent, ^cienc^m 
grades in a more or less regular series. It follows that as rent- 
these changes are going on, the place of agents on the scale ^^^^^^ 
of efficiency is constantly shifting. The various agents rep- 
resent all grades of efficiency. One depreciates, possibly is 
restored later and takes a high place, and again depreciates 
until finally it is thrown out of use. One loom embodies the 
latest improvements and corresponds to the most fertile 
field ; another can still be made to yield a little rent ; the use 
of a third results in certain loss. A great mass of no-rent 
agents lie just below the margin of utilization in every in- 
dustry. Some of these are permanently abandoned; some 
■will be taken back into use when business conditions im- 
prove. When the iron industry is dull, many forges are out 
of blast ; but when iron is again in demand, there is a gradual 
taking up of the abandoned forges, factories, and machines 
as they are brought within the margin of profitable utiliza- 
tion. Many agents not actually earning a rent, may become 
rent-earning through a change in business conditions. 

§ ni. DESTRUCTION OF NATURAL STORES OF MATERIALS 

1. A large part of industry is now conducted vnthout re- Destruction 
gard to the preservation of the source of income. A striking °!^^- 
example of this is the use, or rather the destruction, of the forests 
American forests. In the last century the demand for lum- 
ber grew rapidly both on account of domestic needs and of 
the needs of the older countries. Great quantities of wood 
have been used and still greater quantities wasted, trees 
l)eing girdled, the ground burned over, the timber destroyed 
in any way that would clear the soil— timber which to-day 
would be of far more value than is the cleared land on which 



88 



REPAIR AND DEPRECIATION OF WEALTH 



[CH. 11 



Effects on 
value of 
timber 



Physical 
effects 



Possible 
exhaustion 
of the coal- 
Bupply 



it stood. Considering present needs and conditions, the labor 
seems to have been worse than wasted. 

The direct effect of this destruction of the supply has been 
the increase in the value of timber. To the settlers much of 
the timber was worse than useless ; they paid and labored to 
get rid of it ; now the supplies of lumber must be sought on 
the very margins of our territory: Florida, Maine, northern 
Michigan and Wisconsin, Washington, and Oregon. The 
supplies in Washington and Oregon are almost unavailable 
in the Eastern states on account of the cost of transportation. 
Professor Marsh, thirty years ago, strikingly characterized 
the policy that has b6en pursued: "We are breaking up the 
foundation timbers and the wainscoting of the house in 
which we live in order to boil our mess of pottage." 

The indirect effects of these changes are fully as great as 
the direct ones. Forests greatly affect climate, temperature, 
and soil ; they influence the humidity. They equalize the flow 
of streams, moderate floods, and by preventing the washing 
down of the rich soil, keep the mountain sides from be- 
coming bare and sterile rocks. So, within the last two decades, 
the people in America have begun to think of forestry. Its 
purpose is to restore the forests to the condition of perma- 
nent rent-earners, to make the mountains yield not a tem- 
porary supply, but a perpetual crop of timber. 

2. The extraction of coal and other mineral deposits re- 
duces for future generations a supply already limited. The 
coal deposits in the earth have only recently been drawn 
upon. A small city like Ithaca probably uses to-day a 
greater quantity of coal than was used in all Europe two 
centuries ago. The large deposits of coal and their early 
development in England long gave a great advantage to Eng- 
lish industry over that of other countries. In England, how- 
ever, has first been felt the fear of the exhaustion of the 
coal-supply. Professor Jevons, in 1865, sounded the note of 
alarm ; he prophesied that because the coal deposits of Amer- 
ica were many times as great as those of England, industrial 



^ nil DESTRUCTION OF NATURAL STORES OF MATERIALS 89 

supremacy must inevitably pass to America. Already the 
supremacy in coal and iron production has passed to Amer- 
ica, and that in textiles soon will come. In England the ac- 
cessible supply of coal is limited, deeper shafts must be sunk, 
and the coal gotten with greater difSculty and at greater ex- 
pense. Coal has risen in price in England within the last 
few years, and will continue to rise in the future. The 
coal deposits of America are thirty-seven times as great as 
those of England, but even these will soon be exhausted. And 
yet on the part of all except the coal trust, there appears 
in America a thoughtless disregard for the future. Supplies 
of copper, iron, and lead in favored positions are likewise 
limited, and are being rapidly centered in the hands of great 
companies. The increasing demand for these products insures 
a steadily rising income from their annual use. The value of 
the mines, being based on the series of incomes they will 
yield, may increase while their unused treasures dwindle 
in quantity. 

3. The exhaustion of natural stores of material is due to Many 
civilization, but it threatens to put an end to industrial ^^^^^ 

' "^ resources 

progress. The savage does not go deep enough to use up are being 

permanently the world in which he lives. He uses the fruits ^^P'*^^y 
^ -^ exhausted 

that he finds, and those fruits are, almost without exception, 
renewed the next year. The only mines that were worked 
out in ancient times were gold and silver mines, while the 
mines of useful metals were touched but lightly. Within the 
last century the earth's crust has been exploited with start- 
ling rapidity. Scientific knowledge and mechanical im- 
provement have combined to unlock the storehouses of the 
geologic ages. At the ever-increasing rate of their use, many 
important materials must be exhausted in the not far distant 
future. While it is probable that substitutes will be discov- 
ered for many of them, the outlook in some directions has 
little promise. To treat terminable incomes, exhaustible 
sources of supply, as permanent sources of income, leads 
alike to unsound theory and to reckless practice. 



CHAPTER 12 
INCREASE OF RENT-BEARERS AND OF RENTS 



Desire for 
better 
agents im- 
pels men to 
improve- 
ments 



Improve- 
ments by 
adaptation 
of natural 

resources 



§ I. EFFORTS OF MEN TO INCREASE PRODUCTS AND 
KENT-BEARERS 

1. While man destroys some agents of production he mul- 
tiplies many others. We have noted many kinds of deprecia- 
tion, destruction, and wearing out of wealth ; but the normal 
thing in a healthy society is an increase, on the whole, of 
rent-bearers. The increase of rents is due to two causes: 
changes in the agents by which they become more efficient 
technically, or more numerous ; and changes taking place 
outside of the agents, affecting the utility of the products. 
The first of these will be considered in this section. 

The increase of the efficiency of agents is usually the aim 
of the individual producer, and thus is brought about an in- 
crease of the stock of wealth. In some cases, however, im- 
provements such as the dredging of harbors or as the pro- 
tecting of forests, are made by men collectively through the 
agency of governments. Somewhere, however, the desire for 
these changes must arise in the minds of individuals. In- 
crease of most things involves "cost" or sacrifice, in the 
psychological sense ; that is, man must strive, perhaps suffer, 
to get a certain result. This end, therefore, must be in itself 
desirable, and social organization must be such as to present 
a motive to the men to make the needed effort. 

2. Bent-hearers may he increased in quantity and im- 
proved in quality hy the adaptation of 7iatural resources to 
man's purposes. To get food, men use the tracts of land that 
under the conditions give the largest product. Other tracts 

90 



^I] BY THE EFFORTS OF MEN 91 

less fertile, or for some reason less available, are ditched, 
tiled, aud diked, and fertilizers are carried up steep hill- 
sides to make a soil upon the very crags. In commerce and 
transportation, new ways are opened by canals, railroads, 
and tunnels. An isthmian canal will raise the efficiency of 
ships plying' between New York and San Francisco, enabling 
them to carry a greater amount of freight within a year. 
The tolls will represent to the users an expenditure only 
partially offsetting the increased efficiency of the agents of 
transportation. By the building of wharves, the dredging 
of harbors, and by many other methods, indirect agents are 
constantly growing in number and efficiency. 

3. Rent-hearers may he increased hy inventions and ini- Machinery 
provements that make machines stronger, quicker, and het- ^^oiTof^"" 
ter. This proposition is not logically different from the pre- natural 
ceding. A machine is an arrangement of material things 
through which force may be indirectly applied to move 
matter. No fast line divides machinery as regards form, 
purpose, or cause of value, from the artificially improved 
natural agents that we have been discussing. Just as a field 
is drained, plowed, and cultivated to fit it better to yield a 
crop, so is the iron ore shaped into a form called a machine, 
better fitted to cut, carve, and weave as man wills. Machines 
are merely adaptations of natural resources. 

Increase in machinery may be either in quality or quan- Bettering 
tity. The two causes have in most cases the same result. If ^"^''Jy°* 

. . agents 

the (luality or efficiency of looms is doubled, it is as if their 

number had grown in like proportion. In its economic func- 
tion the beast of burden may not illogically be classed with 
inanimate machines. The horses in America have been re- 
markably improved of recent years by the importation of 
thoroughbred stock from Europe. Ten or fifteen years ago 
the number of horses in the United States was found to have 
decreased, and there was much comment on this evidence of a 
declining industry. It was not at once recognized that there 
was embodied in horse-flesh more horse-power than ever be- 



92 INCREASE OF RENT-BEARERS AND OF RENTS [CH. 12 



Increasing 
number 
and better 
grouping of 
agents 



4 larger 
and better 
environ- 
ment 



fore, as a single Norman horse has the strength of several 
Mexican mustangs. Numbers alone are not the measure of 
efficiency. 

4. The increase of wealth and the betterment of environ- 
ment go on as well through the increase in the number of ap- 
pliances and through their improved arrangement, as through 
changes in their kind. A machine is an adjustment of va- 
rious natural agents to each other so as to make a more effi- 
cient agent, and machines in turn may be adjusted as parts 
of a larger system of production. The ideal of the modern 
factory system is so to arrange the machinery that no bit 
of material will make an unnecessary motion. The log, once 
started through the mill, is carried automatically from one 
machine to another until it emerges as a roll of paper or as a 
box of tooth-picks, ready for use. In an American watch- 
factory one jnan tends twelve or fifteen automatic machines. 
A small brass rod is fed automatically to the machine; a 
piece is cut off, is picked up by a human-like metal hand ; is 
put into a lathe, and shifted or held firmly while it goes 
through fifteen or twenty processes ; and then is dropped into 
a box where it is ready for the "assembling" of the watch. 
As the machinery improves, factories making allied products 
are grouped to make a system still more efficient. 

As the number of agents increases they are distributed so 
as to be where most useful to the owner. A man having two 
umbrellas keeps one at his office and the other at home; a 
student having two books of the same kind keeps one at his 
room and the other at the university; a farmer having two 
hoes keeps one at the barn and the other in a distant field, 
and by this distribution the agents are increased in efficiency. 

The aim of a progressive society is to enlarge the environ- 
ment, and constantly to adapt it better to the service of 
wants. This is done largely by mechanical agents, which 
capture the natural forces of the world, put them into 
the right place at the right time, and make them do the 
right thing, or which group and relate the materials of the 



M] BY THE EFFORTS OF MEN 93 

world in the right ways. Some of the groupings in the 
chemical and physical world that do not fit man's purposes 
may be made to do so. The world in this way becomes more 
and more a great workshop, better and better adjusted to 
man 's wants. 

5. Tlie hetierment of the environment of society i7i some increasing 
directions reduces the rent of other parts. The wish of the ^^ere"*' 
individual is to raise his own rent-bearers in efficiency, but reduces the 
in doing that he affects the agents owned and controlled overs' 
by others. The ideal from a social standpoint is to increase 
not rent but the welfare of society, and this is not always the 
ideal of individuals seeking their own interest. However, as 
the efficiency of some agents rises, it becomes unnecessary 
and unprofitable to use the less fertile fields ; they cease to 
be rent-bearers, and the rent of the richer fields falls under 
the influence of the new supply of products. Some inven- 
tions suddenly increase the efficiency of free goods to such a 
degree that the less efficient rented agents are thrown out of 
use, and the margin of utilization is moved to a higher plane 
than it was on before. Improved types of machinery more 
or less rapidly displace the older, less efficient types, which, 
therefore, more or less completely lose their rent-bearing 
power long before they are physically worn out. When im- 
provements in agriculture that are applicable to a consider- 
able area of land take place, and the product thus is increased 
and cheapened, the poorer land is abandoned. Inventions 
and improvements thus gradually becoming common prop- 
erty, increase the free goods and free uses not bearing rent 
and open to every one. One who improves the quality of 
a machine or the economy of a process may thus uninten- 
tionally injure some of the owners of low-rent agents, while 
unintentionally increasing the welfare of the mass of men 
for whom the margin of utilization is thus lifted. 



94 



INCREASE OF RENT-BEARERS AND OF RENTS [CH. 12 



§n- 



EFFECTS OF SOCIAL CHANGES IN RAISING THE RENTS OF 

INDIRECT AGENTS 



Effect of 
decrease of 
the compet- 
ing agents 



Effect of 
new uses 
for agents 



1. Changes in the number and kind of competing re- 
sources may raise the rents of particular agents. Rents may 
increase without increase in the quantity or number of a 
particular group of agents or without change in their tech- 
nical efficiency. As changes in the conditions of society may 
reduce rents, so other changes may increase them. Agents 
of the same kind may diminish in number, either absolutely 
or relatively. If some of the competing machines are de- 
stroyed, the rents of the machines that remain rise, while if 
new supplies are found, either in nature or by improved in- 
dustrial processes, the rents of the older agents fall. 

2. The discovery of new uses for agents or for their 
products raises their rents. Farm land of the poorest kind 
often is found to contain valuable mineral deposits. Such 
a lucky find has lifted the mortgage from a farm in eastern 
Pennsylvania, from which, in two or three years, has been 
taken feldspar exceeding in value the agricultural products 
of the same land in the last fifty years. The discovery of 
building stone, coal, natural gas, or oil land may make the 
annual rent (or royalty) of land tenfold its former total 
value. Fitness to produce nettles is not ordinarily a virtue 
in land, but the discovery that certain fields produce a su- 
perior quality of the nettle used for heckling cloth, causes 
them to take on a new value. A mineral spring, because of 
the supposed or proved healing properties of its waters, may 
be as good as a mine to the owner. Peculiar fitness for the 
cultivation of celery may convert marsh land into a substan- 
tial source of income. 

Social changes are constantly causing agents to shift from 
lower to higher uses. As population grows and groups about 
new industries, farm land is used for residence lots, and in 
turn for business purposes. Rents therefore rise, and this 



§11] EFFECTS OF SOCIAL CHANGES 95 

rise is reflected in the higher selling value of the land. If a 
new demand arises for the product of any machine, its rent 
rises, although it may continue to turn out the same product 
as measured by number or quantity. For, if consumers in- 
crease, a given supply of agents becomes relatively smaller 
than before. 

3. A rise in rents due to social changes may he 7'elatively sudden 

permanent or temporary. Business conditions sometimes ^ariationsin 
t^ f ^ demand 

change quickly. An urgent demand for special machinery 
raises quickly its rent and value. It is said that lace ma- 
chinery is sometimes thrown out of use for several years, 
until a sudden renewal of the demand for lace causes the 
rental to equal, in two years, more than the original cost. At 
such times the value of factories increases greatly, but after 
a few years of prosperity business again collapses. Such 
prosperous periods are the opportunity of the business man 
and of the promoter to sell the factory at its highest price. 
Machinery adapted only for a special product will not sell 
as readily when less needed for its special use, as that which, 
like a turning-lathe, can be used for many purposes; but the 
more special the appliances needed for a certain product, the 
higher, more abnormal will be their temporary value when 
they are suddenly needed. Land near the site of an expo- 
sition takes on a very great value and again falls after the 
exposition is over. During the Boer War horses and mules 
rose in price in the United States on account of British pur- 
chases. 

A rise in the value of any agent at once causes an attempt cause 
to duplicate it or to find a substitute for it; this attempt, if effortstoin- 

... crease the 

successful, puts a check or sets a limit to the rise. In this supply of 
search for new devices the man who can see most (juickly and ^8^°*^ 
clearly has a key to wealth. Some kinds of agents, as rare 
minerals or tools that can be produced only by highly 
skilh'd labor, cannot be increased rapidly in numbei' and re- 
main high in price for a h)ng period ; and favorably located 
building sites illustrate the same principle. In some cases, 



96 



INCREASE OF RENT-BEARERS AND OF RENTS [CH. 12 



Franchises 
guard the 
growing 
rents from 
the influ- 
ence of 
substitution 



Various 
kinds of 
"unearned 
incre- 
ments ' ' 



it is true, the demand may be due to some temporary cause, 
as in a period of unsound land speculation, but usually the 
growing value of location is due to a steady and abiding 
change in population or business. 

4. Such public utilities as are guarded from competition 
by franchises, often rise in rental with increase in popidation. 
The leading classes of public utilities referred to are water- 
works, gasworks, street-railways, ferries, and wharves. This 
evidently is only a special illustration of the principle just 
stated, where it is not easy to find a substitute for certain 
agents. Public franchises entitle the owners to special, some- 
times exclusive, privileges, and protect them legally from 
competition. Not all franchises are valuable ; many street- 
railways are unfortunate ventures, the earnings being in- 
sufficient to pay expenses, to say nothing of interest on the 
investment. But when they pay greatly, their high value is 
due to the impossibility of competition. The cars, mules, 
dynamos, steam-engines, and other agents combined to fur- 
nish transportation, have a special earning power because 
other similar agents are forbidden to be used in that market. 

5. Industry abounds with cases of unearned increments 
of value due to accidental and social causes raising the rents 
of wealth. The term unearned increment may be defined as 
an increase in rents (or value) of agents, due to something 
other than the efforts or merits of the owner; in fact, it is 
that of which we have been speaking. In some cases power- 
ful or wealthy men can bring about social changes in en- 
tirely legitimate ways. The owner of a large factory, mov- 
ing it into the country, may buy up surrounding land and 
found a city, converting pasture lands and corn-fields into 
valuable building lots. Again, social changes are produced 
immorally, if not illegitimately, when wealthy men or influ- 
ential politicians cause laws to be passed which inure to their 
advantage but which may ruin many other citizens. 

In most cases, however, social changes are impersonally 
caused. The individual owner who profits by them is pow- 



$U] EFFECTS OF SOCIAL CHANGES 97 

erless to affect the result. He can only adapt his conduct in 
some measure so as to reap an advantage. He can strive to 
increase the number and quality and to get control of such 
agents as he foresees will yield higher rents. In making such Aisomany 
a forecast there is chance of loss as well as of gain. The 
term "unearned increment" has been frequently used in 
recent years. It is often assumed to be a peculiar thing, 
sharply in contrast to other changes in value. The foregoing 
hasty review may serve to suggest how manifold and com- 
plex are the instances of it, and what an important part it 
plays in modern industry. 



chances 
of loss 



DIVISION C— CAPITALIZATION AND TIME-VALUE 

CHAPTER 13 
MONEY AS A TOOL IN EXCHANGE 

§ I. ORIGIN OP THE USE OP MONEY 

The con- 1. The exchange of goods by barter is extremely difficult 

siderationoi ^,^^ ynost coses. Thus far we have not considered the subject 

money can 

no longer be of money and have so far as possible avoided even the use of 
postponed ^he term. Value in economics does not depend on money, and 
is not necessarily connected with it. Things can be com- 
pared in their utility, their importance to our welfare can be 
estimated, without the use of money. Many problems of 
economics can be discussed pretty thoroughly and solved 
without the use of the word money or any term of similar 
meaning. But to-day it is impossible to go very far in the 
discussion of economic questions without using the concept of 
money, which is interwoven with every practical and theo- 
retical problem in economics. We have delayed to the far- 
thest limit the formal recognition of the subject; but we are 
now approaching the question of capital and interest, and it 
is no longer possible to avoid a preliminary consideration of 
the money concept. 

In considering the problem of exchange of consumption 
goods, we have assumed that it is possible to weigh small dif- 
ferences in the marginal utility of goods, and that such 

98 



§1] ORIGIN OF THE USE OF MO^EY 99 

differences have influence on exchange. Now in exchange by Exact 
barter such a small estimate is impossible. In barter things ^£^^"7" 
are exchanged directly for each other in kind. If the two utilities is 
things do not chance to coincide in value, the exchange can- ^*^ut'''^^ 
not be completed. An equivalent must be found, or a mul- somemedi- 
tiple, if the marginal utility of two goods is to be equalized ^^gg^" 
for either party by exchange. As in most cases this adjust- 
ment must be very incomplete, many exchanges that other- 
wise would be advantageous cannot take place. In the ear- 
lier stages of development, this careful estimate of value is 
not found. Children do not make it. The typical trade of 
the small boy is a "trade even"; Johnny exchanges his gin- 
gerbread for Jimmie's jack-knife. It marks an epoch in the 
industrial development of the boy when he begins to keep 
store with pins, and no longer trades candy for apples, but 
both for pins, which have become the medium of exchange 
in his boy world. He then can express values in much more 
exact terms. In our society most children begin early to 
grow familiar with this conception ; but travelers find 
some savage tribes still in the earlier childish stage of de- 
velopment, unable to grasp the thought of a general medium 
of exchange. When, through lack of a medium of exchange, 
there is a failure to adjust utilities, there is a loss of the pos- 
sible advantage in each defeated exchange. There is a fur- 
ther waste of time and of vain efforts to find something that 
will be accepted in exchange, and the loss offsets a large part 
of the gain even when the barter is effected. 

2. Some kind of enjoyable good in general use comes to Money la 
he money, that is, to he accepted as a medium of exchange, gg^ggg^ 
The difficulties just mentioned are met by the use of a me- general 
dium of exchange. A medium of exchange is simply one ^^^r^g 
kind of wealth which is taken, not for itself, but to pass 
along, in the belief that it will enable the taker to gratify 
his wants and distribute his purchasing power in a more 
effective way. Money is an "invention" in that it is a means 
of exchange that came into use independently in a great 



100 



MONEY AS A TOOL IN EXCHANGE 



[CH. 13 



Qualities of 
the primi- 
tive money 



number of communities. It is not an invention in the sense 
of a mechanical device suddenly hit upon, but rather in the 
sense of a social custom that grows as its convenience is 
tested by practice. Money is used, in some degree, every- 
where except in the most primitive tribes. Historically 
viewed, the money first used in any community is seen in 
every case to be a commodity capable of giving im- 
mediate gratification, a direct good in immediate use. It 
then gi-adualiy comes to be used as money, w^hich is an in- 
direct agent. Still later, when the money habit is well estab- 
lished, a kind of material having no utility except as a me- 
dium of exchange may come to be used. 

3. Money in its origin is that good which best unites the 
qualifies that make it easy to sell, to carry, to know, to keep, 
to diviclc, and unite. It is evident that if some one com- 
modity is gradually to take on this use as a medium of ex- 
change there will be a choice ; some things will be better fitted 
than others. First, this thing must have the quality of sal- 
ability, or marketability. In the channels of exchange it 
is taken not because it is wanted for itself, but because it 
will help to get something else that is wanted. To be sure of 
a ready sale in a primitive community it must, however, be 
something that is generally desired. Food and clothing, 
which supply the fundamental physical needs, are the most 
generally used and desired of all goods. But they do not 
have the second quality of a good money material, that of 
great value in small bulk, transportability. Food is bulky. 
The carrying of a venison or of a bag of wheat on one's 
back a short distance requires an effort as great as that for 
the procuring of the food. Furs, however, have this quality 
in a high measure, united with other qualities of money, as 
is shown by their general use in the exchanges of northern 
tribes. Thirdly, a thing must be recognizable ; counterfeits 
must be easily avoided, and the quality must be easy to test : 
this is the quality of cognizability. The love of ornament 
is universal in human societies, and gives value to many 



§IJ ORIGIN OF THE USE OF MONEY 101 

materials combining in a high degree the qualities thus far 
named. Fourthly, the money material, when taken in ex- 
change, must remain without loss of quality, perhaps for 
long periods, until it can be exchanged again. Food does 
not answer to this requirement, being organic and perishable. 
But some of the metals, having value in small bulk, salabil- 
it}', cognizability, and durability, step by step displaced 
other forms of money. Finally, money must be made of a 
material easy to divide and unite. It is a great convenience 
in small transactions to be able to represent a fractional 
value by a small coin. The money material thus, likewise, is 
easily shifted to and from its money use. It is a very poor 
money that has not this quality, yet a thing may serve for 
money in la'tger transactions without it. Cattle, slaves, and 
land have been thus used, although they answer in a very 
rough way these fundamental requirements of the money 
material. 

4. The changing material and industrial conditions of industrial 
society change the kind of money that is used. The money ^g^f^^g 
use, as has just been shown, is a resultant of a number of convenience 
different motives in men. Things that have the highest claim '^^^^^ 
to fitness for money with a people at one stage of develop- forms 
ment would have a low claim at another. As each of these 
stages is passed, the thing used as money either increases or 
decreases in its fitness. The final choice depends on the re- 
sultant of all the advantages. The use of a material may 
become more general or less so. Shells used for ornament in 
poor communities cease to be so used in a higher state of ad- 
vancement, and thus their salability ceases. Furs, used at 
some stage of development as money in all northern climes, 
cease to be generally marketable when the fur-bearing ani- 
mals are nearly killed off and the fur trade declines. To- 
bacco was at one time in Virginia a great staple. Merchants 
were always ready to take it, and its market price was known 
by all ; but as it ceased to be the almost exclusive product of 
the province, it lost the knowableness and marketability it 



102 



MONEY AS A TOOL IN EXCHANGE 



ICH. 13 



The proved 
fitness of 
gold and sil- 
ver as 
money 



had before. In agricultural and pastoral communities where 
everyone had a share in the pasture, cattle were a fairly con-, 
venient form of money, but to-day would be a most incon- 
venient one; a city merchant exchanging goods for Poland 
China pigs and Texas steers would envy the proverbial owner 
of a white elephant. 

The value of the money material may fall so greatly as a 
result of greater production, as in the case of iron, tin, 
copper, that it becomes unsuitable. Again, as wealth grows, 
as exchanges increase, as the use of money develops, as com- 
merce extends to more distant lands, the heavier, less pre- 
cious metals fail to serve the money need, especially in the 
larger transactions. Thus, in a sense, different commodities 
compete, each trying to prove its fitness to be a medium of 
exchange; but only one, or two, or three at the most, can at 
one time hold such a place. Silver and gold, step by step, 
often making little progress in a century, have displaced 
other commodities, and are the staple and dominant forms 
of money in the world to-day. Every community has wit- 
nessed some stage of this evolution. Now nations are di- 
vided into two great groups, silver- and gold-using, in accord- 
ance with the metals they use as standards. The gold-using 
countries are the most advanced industrially, requiring the 
most valuable money metal. Many countries have passed 
in the last century from the silver to the gold standard, 
and in an intermediate period have tried to use both 
standards. The Asiatic and South American countries 
mainly use silver, while most of those in North America and 
Europe use gold. 

While industrial changes thus affect the choice of money, 
in turn money reacts upon the other industrial conditions. 
If a new and more convenient material is found, or the 
value of the money metal changes to a degree that affects 
the generalness of its use, industry is greatly affected. 
The discovery of mines in America brought into Europe, in 
the sixteenth century, a great supply of the precious metals, 
and this change in the use of money reacted powerfully on 



§11] NATURE OF THE USE OF MONEY 103 

industry. Money being itself one of the most important of 
the industrial conditions, is affected by and in turn affects 
all others. 



§ II. NATURE OF THE USE OF MONEY 

1. Money in all its money uses is an indirect ageyit, to he Money is an 
judged just as other indirect agents are. The key to this agent% 
section is the thought that the function of money is to serve tool to effect 
as an indirect agent. Money is often, by a figure of speech, ^^^ ^°^^^ 
called a tool. Literally a tool is a bit of material which, 
taken in the hand, is used to apply force to other things, to 
shape them or move them. Figuratively, this is just what 
money does. A man takes it in his hand not to get enjoy- 
ment out of it, but to apply force, to move something, and 
that which he moves is the other commodity. Adam Smith 
aptly likened money to the road and wagons that transport 
goods, thus gratifying wants by putting things into a more 
convenient place. Money is only one of a multitude of 
forms of wealth. It is not even the most "valuable"; it has 
value just as other indirect agents have. The loss caused by 
taking away an indirect agent entirely is greater than the 
benefit usually attributed to it. Its utility in the extremest 
conditions is greater than its marginal utility under ordi- 
nary conditions. Food is not credited in the market with 
enormous value, but if starvation threatened, all else would 
be given for food. In a like manner, each individual values 
money according to the importance of the marginal service 
it renders, but the marginal service is far from measuring 
the loss that would be caused by the entire disuse of 
money. In a society without money, industrial processes 
would be very different, and exchange would be hampered 
in almost inconceivable ways. It is true, therefore, that 
money is an economic factor of high importance, but it is 
not so indispensa})le as many other factors to which far less 
value is attributed. 

A poor community has little money because it cannot af- 



104 



MONEY AS A TOOL IN EXCHANGE 



[CH. 13 



The use of 
money as a 
common 
denomi- 
nator 



Why a poor f ord more ; it gets along with less money than is convenient 
community • ^^^ ^^ -^ ^^g along with fewer indirect agents of every other 

lacks money -i ^ '=> 

kind than it could use. Pioneers m a poor community 
where the average wealth is low, cannot afford to keep a 
large number of wagons, plows, good roads, or school-houses. 
If the conmiunity were wealthy enough it would have more 
of these and of other things, and great as is the convenience 
of money, poorer communities have to do with little of it. 
It is, therefore, a confusion of cause and effect for poor com- 
munities to imagine that their poverty is due to lack of 
money. 

2. Out of its use as a medium of exchange comes the use 
of money as a common denominator of values. Money serves 
as a " common denominator, ' ' for, as all other things can be 
expressed in terms of money, through it the value of other 
things can be compared. The other things can be expressed 
in money because they are constantly exchanged for it. 
All things being compared with money, can in turn be com- 
pared with each other. Some consider this service as a com- 
mon denominator to be the primary and most important 
function of money. Sometimes a money of account is found, 
which is not in use as a medium of exchange. Cattle and 
slaves have served as money of account while not used as a 
medium of exchange in larger transactions. Money of ac- 
count is used, as the shilling in New York, which for 
a century has not been in use at all as a medium 
of exchange. It is, however, only apparently a denom- 
inator of value; the shilling represents five fourths 
of ten cents. The actual standard is the dollar ; the shilling 
is only a habitual form of speech and is mentally reduced to 
terms of the money in use. A decimal system is a great con- 
venience in the use of money as a common denominator, but 
not indispensable. It is a striking fact that England, until a 
few years ago the greatest industrial nation, still uses a 
money unit requiring cumbrous calculations. 

3. Other uses of money are as a storehouse of saving 



§in] 



THE VALUE OF TYPICAL MONEY 



105 



a7id as a standard of deferred payments. These uses grow Money used 
out of those before mentioned. The standard of deferred ^^astore- 

' ' _ house for 

payments is the unit of value in which debts are agreed to be saving 
paid later. It is evidently most convenient, and therefore al- 
most inevitable, that the common denominator in which all 
values are expressed from day to day should continue to be 
taken as the value unit when the completion of the exchange 
is delayed a day, a month, or a year. This will be more fully 
discussed at a later stage of our study. 

The use of money as a storehouse of saving was more com- 
mon formerly than it is now, when better ways than the 
hoarding of money are found for " laying up for a 
rainy day." In some measure, however, money is hourly 
serving this use, which is still an important one. Money 
kept to be used to-morrow or five years hence is a 
storehouse of value for twenty-four hours or for five years. 
In either case it is being kept to complete at a later time its 
use as a medium of exchange. A thing ceases to be money, 
logically viewed, the moment its owner keeps it without the 
purpose that it shall be spent ultimately. The typical miser 
is a man who has lost his reason as regards the money use. 
Money must be deemed, therefore, to perform the same es- 
sential service as a storehouse of saving that it does as a 
medium of exchange. In either case it is to be kept only to 
the moment when it will afford the maximum of pleasure. 



§ III. THE VALUE OF TYPICAL MONEY 

1. The money use, histo7'ically considered, is a new use The money 



added to a good, and increases the demand for that good. 
The history of any particular kind of money may be traced 
back to a point where it was not money, since which the 
money use has been added gradually to the other uses. The 
value of the material later to become money is determined, as 
is that of any good, according to its marginal utility in all 
possible applications. No new theory is required to explain 



use is added 
to other uses 



106 



MONEY AS A TOOL IN EXCHANGE 



[CH. 13 



The other 
uses con- 
tinue, 
slightly 
modified by 
the money 
use 



Money 
yields a 
series of 
rents which 
are the basis 
of its value 



the value of this same commodity as it gradually acquires the 
added use of a medium of exchange. The new use influences 
demand for the thing just as do the other uses. What is here 
said must be understood as applying to typical money, which 
is at the same time a commodity having other uses. Other 
things that are not typical money come later to be used as 
money, under legal regulations. 

2. A good that comes to he used as money continues to 
have a commodity use along with tJie money use. When a 
thing is wanted for some quality that gives immediate grat- 
ification to the user, the explanation of its value is simple. 
Ornaments, shells, feathers, food can be seen to have a direct 
want-gratifying power. The money use is one that works no 
physical or visible chatige in goods, and to many minds it 
appears so different from other utilities that it remains 
quite mysterious and incomprehensible. To persons accus- 
tomed to thinking on problems of value, this case appears 
to be no more difficult than that of anything else having two 
or more uses. Cows are used for milk, for meat, and as 
beasts of burden. Each of these uses is logically independent 
as a cause of value, yet all are mutually related, the values 
of cattle being determined by the consideration of all their 
uses united into one scale of diminishing utility. 

3. The uses of money make it a rent-hearing form of 
wealth. The rent that money yields is in the form of conve- 
nience and economy. This is sometimes rendered directly as 
psychic income, as in enabling the traveler to buy his dinner, 
for the money thus yields gratification just as does the car- 
riage in which he rides. One may go for a day to the sea- 
shore without a parasol and suffer from heat, or without 
money and suffer from hunger. In every case where money 
is retained for a time in possession, there is expected from it 
a usufruct as great as, or greater than, can be secured from 
anything, else for which it can be exchanged. This usu- 
fruct is a net surplus, or income, yielded by a sum of money 
undiminished in amount up to the moment it is spent, but 



§111] THE VALUE OF TYPICAL MONEY 107 

meantime increasing in the gratification it will help to se- 
cure. In many cases in practical business money yields 
gratification only indirectly, as the objective contract rent 
received as interest for borrowed money in business uses, 
or as economic rent when the use of money in business enables 
one to secure a larger income. Because money yields a 
rent men make the sacrifice involved in keeping a stock of 
it on hand. On this rent is based that part of the value of 
money that is derived from its money use. As the use of 
money as a standard of deferred payment, or basis of com- 
mercial obligations, does not require that it be owned by the 
parties writing the contract, this use of money is a free 
good, a sort of social by-product of the medium of exchange. 
AVhen money is in use in a community, any person may 
draw up contracts in terms of money, borrowing and lend- 
ing, buying and selling wealth, later to be repaid in other 
wealth or services expressed in the circulating medium. 

4. Money may be defined as a generally accepted material The general 
means of payment and medium of exchange. This, its ^o°is 
primary and essential function, may appear to be less im- character- 
portant as new modes of balancing accounts of wealth are ^^^° 
devised. But its functions as a common denominator of 
values and as a standard of deferred payment are increas- 
ingly important in an advancing society. It is this expres- 
sion of the value of all other things in terms of money 
which may well be deemed the essential characteristic of the 
capitalistic age. In earlier periods wealth was thought of 
and expressed in concrete terms; now it is expressed in 
money. The general use of money affects men's ways of 
looking at wealth and speaking of it. Without appreciating 
the nature and function of money, it is impossible to grasp 
the significance of capital in modern industry, the consid- 
eration of which we are now to enter upon. 



CHAPTER 14 

THE MONEY ECONOMY AND THE CONCEPT 

OF CAPITAL 



Various 
points of 
view of the 
students 
regarding 
money 



§ I. THE BARTER ECONOMY AND ITS DECLINE 

1. The use of money prevails in very different degrees 
in various parts of the United States. The members of this 
class, representing nearly every state and territory in the 
Union, have lived amid very diverse industrial con- 
ditions. Some know best the country where conditions are 
similar to those of a hundred years ago ; some, the villages 
where may be seen the handicrafts and the small general 
store. Others know better the cities with their varied indus- 
tries; while doubtless still others, through family relations, 
know of the methods of great wholesale business, perhaps 
even of the larger commerce and foreign trade. Methods dif- 
fer in the different lines of business, and according as a man 
is a farmer, a merchant, or a banker, he has different ideas as 
to the use of money and of the part it plays in modern in- 
dustry. You come to this study with different experiences 
and preconceptions; as a result every statement produces 
a somewhat different impression on each of you. This is 
true in general of the statements made in political economy ; 
but it is most strikingly true in the discussions of money. A 
city boy rarely sees a case of barter ; whereas in many parts 
of the West and Southwest, and in the mountainous districts 
of the East, a large part of the business is carried on in this 
way. Town and city in New York state differ in this respect, 
but hardly more than do the rural districts of the different 

108 



U] 



THE BARTER ECONOMY AND ITS DECLINE 



109 



sections of our country. Banks are very numerous in the 
East, are few in the Northwest, and still fewer in the South. 
Men can understand each other better in a discussion if they 
are conscious of the fact that they do not instinctively take 
the same point of view. 

2. The extent to ivhich, on an average, moneu is used in countnes 
different countries of the world, differs widely. Statements f5"'° . 

, . . '11 u their use of 

in political economy must be guarded; few of them can be money 
taken as universally true. As the different parts of one 
country may be contrasted, so may the different countries. 
The use of money in Siberia would be much less than that in 
Moscow and St. Petersburg, and again the average use in 
AVestern Russia is doubtless less than that in Austria. In 
Austria the money use is less developed than in Germany. 
"While there is now little difference between Germany and 
France in this respect, France for a long time was the more 
developed industrially and made greater use of money. 

There is greater use of money in the cities of the outlying 
countries than in the rural districts. In the cities of Mexico 
banks and credit agencies are employed as in the American 
cities. The rural districts are more backward and make far 
less use of money than is the case in the United States. The 
great ports of China are provided with all the facilities of 
modern banking. In the great cities of India one can get 
a bank draft that will be paid in any part of the world. But 
go a very little way out of the cities of China and India, 
and conditions greatly change ; money is far less used and 
principally as a storehouse of saving. 

3. In a historical view the European nations are seen slight use 
to begin with a barter economy and to pass through great "hJwilfJJ" 
changes as regards the use of money. Here the view shifts 
from a comparison of different nations at the same moment 
to a comparison of the same nation through a period of 
centuries. To understand, even in a measure, what is about 
them men must know out of what it grows. In the early 
]\Iiddle Ages money was used chiefly in cities, and there 



the Middle 
Ages 



110 



THE CONCEPT OF CAPITAL 



[OH. 14 



" barter 
" natural 



) » 



Land, the 
main form 
of wealth, 
was rented 
without the 
use of 
money 



only to a limited extent. Almost universally a 
economy " prevailed, or, as it has been called, a 
economy," a term taken from the German " Naturalien, 
which means natural products, enjoyable things, as opposed 
to money. Natural economy, therefore, means that condi- 
tion of society in which things are exchanged in kind. In the 
IMiddle Ages land was the great and dominant form of 
wealth. The prince himself was dependent on land for his 
income. The conquering chief or invader took possession 
of the land and parceled it out to his followers, and they in 
turn to their vassals. The income of the rulers was in the 
form of "Naturalien" (wheat, chickens, eggs), the kind 
and amount of which was fixed by contract or by immemorial 
usage. The landlord had land as his wealth and income- 
getter; the tenant received the use of the land in payment 
for his labor. 

The condition of the serf appears to have been, under 
these circumstances, inevitably connected with the " barter 
economy " as applied to the renting of land. A farm can- 
not be moved, and in medieval conditions its products mainly 
had to be used on the spot. If the serf was to use and enjoy 
the land, he had to stay upon it. Having no money he had to 
pay in labor or in products, for its usufruct. In those times 
the powerful man, politically, was also a wealthy man whose 
wealth consisted of landed estates. Between the landlord and 
the serf existed a lasting relation, inherited rather than 
voluntary, but similar in its conditions to the renting con- 
tract. The villein had the use of the stock, pastures, fields, 
woodlands, provided he kept them undiminished and unde- 
stroyed to transmit to his children. Under such conditions 
there was great fixity of economic relations. While in some 
respects this was a happy condition, it had its disadvantages. 
The renting contract, in connection with a fixed rotation of 
crops and some communal modes of cultivation, hindered 
improvements. The more intelligent cultivator could not 
change his methods for the better. It may be seen not only 



§1] THE BARTER ECONOMY AND ITS DECLINE 111 

that the use of money ou a medieval manor was slight, but 
that the conditions for the growth of the money habit were 
most unfavorable. The terms of agricultural contracts, the 
modes of speech, the habits and thought of the mass of the 
people, were therefore determined by the conditions of the 
barter economy. A change in these respects was slowly 
worked by forces Originating outside, in a very different 
industrial environment. 

4. With the growth of cities developed a new class of contrast be- 
wealthij men and a new vieiv of wealth. The student of t^eencity 

wealth and 

history knows of the conflict that grew up during the Middle feudal es- 
Ages between the cities and the landed aristocracy. It tatesmthe 

^ . . "^ . Middle 

found its cause in economic conditions. There were obvious Ages 
differences between the wealth of the feudal landlords, and 
the wealth that grew up in cities. One must be used mostly 
on the spot, the other can be moved. The fruits of one are 
perishable for the most part ; the fruits of the other can 
be kept for a longer period. The methods of agriculture 
are exceptionally stable ; production by handicraftsmen is 
dependent on the peculiar skill of the workman, giving 
greater room for invention and a premium on skill. The one 
industry may be carried on by servile labor; the other 
can be efficiently followed only by free workers having the 
ambition to excel. 

The use of money grew up in the city. The density of Money thus 
population made it easy, the growth of wealth made it j^oreused 
possible, and the nature of the exchanges made it necessary. 
Whereas the relation of landlord and serf under the renting 
contract continues from year to year, the relation of the 
buyer and seller of shoes, hats, etc., in the city, is temporary, 
these things forming only a part of man's economic needs. 
Barter with a particular individual is much more incon- 
venient if exchange is only occasional than where the 
contract is a continuing one, and there is an annual balancing 
and settlement of accounts. So, as city industry and com- 
merce erew the use of money increased, both in small 



112 



THE CONCEPT OF CAPITAL 



[CH. U 



IVDuey 
loaned and 
borrowed in 
cities 



The medie- 
val opposi- 
tion to loans 
at interest 



ne-'ghborhood trade and in the larger transactions with dis- 
tant countries; and thus the business methods of the cities 
grew into sharper contrast with those of the rural districts. 

5. The loan and hire of wealth in medieval cities came 
to he expressed as a money loan. The loan of money and 
of other wealth expressed in terms of money, began in the 
cities. The use of money and the expression of the value 
of things in terms of money was common there throughout 
the Middle Ages. Moreover, as the movable forms of wealth 
multiplied, the agreement to return borrowed wealth in kind 
became impossible in cities; the loan in terms of money be- 
came the only practicable thing. A merchant embarking on 
a trading expedition must have such a number and variety 
of goods, that he finds it both very difficult to rent them 
and wasteful in time to enumerate them and return them in 
like kind. It therefore became usual to make a loan either of 
the things expressed in terms of money, or of money with 
which to buy the things, thereby reducing to a single, simple, 
easily interpreted contract, the indebtedness which the bor- 
rowing of a thousand different things occasioned. 

Such a contract differed not in economic purpose, but only 
in form and terms of obligation, from the renting of wealth. 
The church writers, however, got much confused in regard 
to the nature of money loans. They did not see that it was 
things which the merchant wished to borrow. They did not 
see that the money loan was simply a more convenient mode 
of tranferring the use of wealth from one person to another. 
The moralists and lawmakers of that day said : Money is 
unfruitful, therefore taking interest for it is robbery. We 
cannot follow here the controversy as to the justice of interest 
on money which involved other ideas than those mentioned, 
but even to the present time traces of the old fallacy may be 
seen more or less plainly in the economic theory as well of 
conservative writers as of the socialistic opponents of in- 
terest. The principal sum expressed in the loan contract 
was called the capital sum, from caput, head, and the amount 



5 1] THE BARTER ECONOMY AND ITS DECLINE 113 

paid for its use was first called usury, money for the use. 
How the word interest came to take its place, and the word 
usury came to mean excessive interest is one of the most 
interesting chapters in economic history. The term capital 
then came to be connected with city wealth, with movable 
forms of wealth, with things supposed to be peculiarly " the 
product of labor " ; and interest was assumed to be connected 
only with this capital. The term rent on the other hand was 
connected especially with the use of land. The connection 
was a historical accident, but it has had an important in- 
fluence on economic theory. 

6. Tlie owners of city wealth and of country landed Rivalry oi 
estates often were opposed as well in social and political as t^^'^"™" 

. . . . . mercialand 

in economic affairs. The practical economic questions of the land-hoidmg 
Middle Ages and the practical political questions largely classes m 
turned on these two groups of interests. The men of wealth 
in the cities, the merchants and manufacturers, often were 
found opposed to the landed aristocracy. This social divi- 
sion between the commercial and agricultural classes doubt- 
less helped to strengthen the prejudgment as to the nature 
of the two kinds of wealth. Indeed, in view of the situation, 
it may have been in a measure justifiable and expedient to 
contrast the thought of city wealth, which has come to be 
called capital, with that of landed wealth. But even if it 
were, it is now misleading and erroneous to continue the use 
of such concepts in a new country and in our modern 
conditions. 

Indeed, for centuries the sharper features of the con- Land con- 
trast have been steadily softened. The money economy of J^„"g^^jj^g 
the city gradually spread to the rural districts, but never city wealth 
entirely displaced barter, which lingers everywhere. Im- ^^^""^^"^ 
portant steps toward a money economy were the commuting form 
of forced or customary labor of the serfs into a money pay- 
ment to the lord, and at the same time the substitution of 
money payments for payments in kind (use of lands, speci- 
fied goods, etc.) to the peasants. Thus arose a free peasant 



114 THE CONCEPT OF CAPITAL [CH. u 

class receiving wages. But land continued to be rented and 
landed estates to be hereditary throughout Europe. As they 
did not pass from hand to hand as a commercial or market- 
able form of wealth, their value was rarely, if ever, expressed 
in terms of money and as a ratio to the rent they bore. The 
result was the fixing of the erroneous idea that agricultural 
wealth is essentially different in the character of its service 
and yield from wealth used in manufactures. One phase of 
the error was the idea held by the physiocratic writers and by 
Adam Smith that in agriculture " nature labors along with 
man," while in manufacture " nature does nothing, man 
does all." This view was corrected by later critics (Bu- 
chanan, Ricardo, and others), but the main portion of the 
fallacy persisted in the supposed contrast between the char- 
acters of the services performed by natural resources and by 
artificially produced wealth. 

§ II. THE CONCEPT OP CAPITAL IN MODERN BUSINESS 

Extension 1. The development of the use of money and credit has 

of the use of ^^^ ^^ fj^^^ expression of the value of all indirect aqents, 

the money . .... i* > 

loan and of without distinction, in terms of money. This is a capitalistic 

concTt'^ age. The development of a class of money-lenders has led 

to a transfer of all sorts of wealth from owners to users by 

means of money. As in medieval Europe city wealth was 

bought and sold, and measured and expressed, so in twentieth 

century America are the farm, the waterfall, and the mine. 

(Every purchase with money owned or borrowed is to-day 

called an investment of capital. To invest means to clothe, 

and an investment of capital is clothing money in any kind 

of wealth, whether it be a ship, a factory, or a farin;) 

Interest on money is the contractual form in which more 

and more the use of wealth is paid for. The borrower does 

not ask the wealthy man to buy for him a factory and to 

rent it to him. It is not impossible for the transaction to take 

that form ; but in practice it is inconvenient. The capital 



511] THE CONCEPT OF CAPITAL IX MODERN BUSINESS 115 

concept, the expression of wealth in the form of money, 
spreads over almost the whole face of the economic world. 
In promissory notes, mortgages, capital stock, bonds, and 
many other forms, are expressed the obligations of bor- 
rowers bound to pay regularly a sum called interest for the 
use of the multifarious wealth they have chosen to employ. 

2. Capital to-day may be defined as economic wealth ex- Definition of 
pressed in terms of the general unit of value. In economic *^p^^^ 
discussion new conditions must be recognized and an attempt 
made to adapt definitions to the language and needs of prac- 
tical life. By this definition, capital, at any given moment 
of time, includes all economic goods in existence, when they 
are thought of in terms of their value. But things have 
different durations, some are parts of the capital of the 
world only for an instant, others for a week, a month, or 
years. Most capital is composed of things durable in a large 
degree. 

It has been seen above that there is no reason for keeping 
things unless they •will increase in value, that is, unless a 
rental is logically attributable to them. Everything kept 
for a day, a month, a year, is kept because thus it will 
continually give off uses or by accumulating them it will 
become more useful. Hence, when interest is defined as 
the payment for the use of capital, it is connected with all 
wealth that is expressed in the capital form. In practical 
business and in theoretical discussion this is the idea of cap- 
ital that alone can be consistently followed. Capital is the 
value equivalent of a sum of money " invested," " clothed " 
in forms of wealth purchased and exchanged. Wealth has 
become fluid in modern times ; it was crystallized in medieval 
times. Under the new conditions, wealth, expressed in the 
mobile form of capital, flows into the most distant corners 
of the industrial world. 

3. Capital must not he identified with money although Distinction 
it is expressed in terms of money. While money and capital money and 
are not identical, neither are they opposite or mutually con- capital 



116 



THE CONCEPT OF CAPITAL 



[CH. U 



Contractual 
interest and 
rent involve 
a difference 
of business 
procedure 



The wealth 
concept and 
the capital 
concept con- 
trasted 



tradictory. Money is but one species of the genus capital. 
It is a particularly durable form when industry as a whole 
is considered, a particularly fleeting form in the individual's 
possession, and a particularly important, though not neces- 
sarily the most important, form in its social significance. 
The things composing capital are concrete things, scarce 
forms of wealth, some of which are yielding gratification at 
the present moment, or are destined to do so at some future 
moment; others of which are not themselves giving direct 
gratification, but are indirect agents for the gratifying of 
wants. To this latter group belongs money. 

The caution contained in this proposition may appear to 
some to be superfluous, but it is most needed. The mind is 
so prone to identify things that are expressed currently by 
the same words. The ease with which money and capital are 
thus confused has led to various popular fallacies on practi- 
cal economic questions. 

4. Renting wealth and borrowing capital have the same 
economic purpose, hut the capital contract presents certain 
peculiar features. In the interest contract for the loan of 
capital the interest always is and must be expressed in 
money ; the capital sum must be expressed as value ; and the 
interest rate expresses the relation between these two values. 
In each of these features the interest contract is in contrast 
with the renting contract. While the rent itself may or may 
not be expressed in terms of money, the value of the rented 
wealth is not so expressed, and there is no rent-rate express- 
ing the relation between the two values. 

As here presented, the essence of the capital concept is 
in the mode or form of expression of wealth, not in the 
physical nature, the origin of its value, or any peculiarity in 
the kind of wealth ; the content of the concept is limited only 
by man's thought of wealth, every good becoming capital 
when it is capitalized, that is, when the totality of its uses is 
expressed as a present sum of values. The difference between 
the wealth concept and the capital concept is therefore sub- 



5 11] THE CONCEPT OF CAPITAL IN MODERN BUSINESS 117 



jective, not objective; it is a difference in the mode of man's 
thought regarding wealth. The rent contract and the inter- 
est contract are modes of borrowing and lending which re- 
fleet this dift'erence of conception. In their effort to express 
more exactly to themselves and to others the relative felt- 
importance of their environment, men take in turn different 
points of view, and use different modes of expression. The 
most developed and exact of these devices for the social 
expression of valuations, which became possible only with a 
money economy and widened markets, is the capital con- 
cept, whose nature has been analyzed here. ^_, 

Summarizing the thought of this chapter, it may be said The capital 
that the capital concept has gradually developed with in- pfevlienT"^ 
dustry, and is now the most widely prevailing mode of 
expressing the quantity of wealth. It is used in the discus- 
sion of all the most important problems of modern industry. 
The questions of income from wealth, of trusts and corpora- 
tions, nearly all that is most notable in the development of 
modern industry, require the use of the capital concept. 
Yet (returning to the thought with which this chapter 
started) in many of the outlying districts other modes of 
looking upon wealth are employed. References to modern 
industry must be understood usually as applying to the most 
developed capitalistic conditions. 



CHAPTER 15 
THE CAPITALIZATION OF ALL FORMS OF RENT 

§ I. THE PURCHASE OF RENT-CHARGES AS AN EXAMPLE OP 

CAPITALIZATION 

The nature 1. From the twelfth to the sixteenth centimes the sale 
of'rent-^ ^'*^ pwrc/tase of rent-charges was the most general form of 
charges borrowuig and lending wealth. A rent-charge in the Middle 
Ages was a definite income that was to be paid out of the 
rents of an estate, business house, manor, etc. The property 
was said to be " charged ' ' with the payment of that income, 
and some estates were passed on for generations from father 
to son charged with a certain rent. It was thus possible 
for the owner of money to buy a rent-charge, either one that 
had been created a generation before, or a new one created 
by some landowner for the especial purpose of borrowing 
money to go on a crusade or of improving his estate or of 
investing in other business. The transaction took this 
form : the purchaser of the rent-charge paid a sum of 
money, called the capital sum, and obtained in return a 
rent-paper entitling him to receive permanently a given 
income. The house or land was security for the debt. The 
seller gave up the right to the rent as it came in year by 
year, and received in return a capital sum in hand. Gener- 
ally he had the right to repay the sum whenever he wished 
and thus extinguish the rent-charge. Logically viewed, the 
purchaser bought an equitable part of the income, therefore 
an equitable part of that rent-bearing wealth. In effect it 
was just like a loan except that the purchaser of the rent- 

118 



§1] THE PURCHASE OF RENT-CHARGES 119 

charge could not demand the repayment of his money. He 
could, however, sell the rent-charge when he wished to get 
his capital out. Gradually it became usual to sell and trans- 
fer rent-papers just as is done to-day with mortgages and 
bonds. Rent-papers thus came in the fifteenth century to be 
negotiable paper in somewhat general use. There was a 
rise and fall of the value of the rent-paper with changes 
in the demand for investment in rent-charges or with 
changes in the security. 

2. The sale of rent-charges grew out of an industrial need Rent- 
of the exchange of safe permanent incomes for larqer sums ^^^^s^^ 

„ „ were a con- 

of wealth. The custom of the purchase of rent-charges grew yenientm- 
up in the cities. The increasing wealth of cities, the growth ■^'^stment 

J; . in medieval 

of commerce and enterprise, caused rent-charges to be sold cities 
by the owners of houses and real estate in the cities, and the 
custom spread to the country. It is an instance of the way 
income became more fluid in the cities during the Middle 
Ages. This kind of loan contrasted strikingly in the Middle 
Ages with those loans made commonly by reckless kings, 
prodigal nobles, and distressed peasants to secure consump- 
tion goods. Merchants needed large amounts of wealth 
for their growing enterprises, and they felt that if they could 
get a capital sum down they could make it earn more than 
the rent-charge. A perpetual income of one hundred units 
was therefore exchanged for a sum at the moment of twenty 
or twenty-five times that amount. As the wealth of the 
cities increased, there were some men who wished to retire 
from active business, and there were widows and children 
with property which they could not manage directly. Such 
persons either could not afford to take the risks of active 
business, or could not judge of them, and they formed a 
class of lenders or investors seeking some safe income. Be- 
tween the two classes of active merchants and capitalist 
lenders, each of whom saw his own advantage and followed 
it, the practice of buying and selliner rent-charges thus grew 
up. 



120 THE CAPITALIZATION OF ALL FORMS OF EENT [CH. 15 



Rent- 
charges 
were not 
forbidden by 
the church 



The market 
value of 
rent- 
charges re- 
flects the 
exchange 
ratio be- 
tween pres- 
ent and 
future 
money in- 
comes 



The practice was allowed by the church, though interest 
and the lending of money were forbidden. The loan was 
substantially a loan of capital and the rent-charge was sub- 
stantially interest, but in the eyes of the church moralists 
there was a marked difference, in that the obligation to the 
purchaser of the rent-charge was secured by a permanent 
and substantial form of wealth, and the contract usually 
was favorable to the borrowers. In its origin the practice 
was not merely an evasion of the law against usury, but a 
convenient form of contract. It doubtless came, however, 
to be used as a means of evading the law of the church 
against usury, and thus became an entering wedge for the 
general use of money loans. 

3. Rent-charges had a market-value, varying with time 
and place, and expressed as a number of years' purchase of 
the rent-charge. The sellers of rent-charges were influenced 
by many motives : a lord wished to build a castle, or go on a 
crusade ; a farmer wished to improve his estate ; a merchant 
wished to embark on larger ventures. Opportunities thus 
opened in the cities for men of wealth to get a fixed income 
for a payment of ready money. In the cities, the buyers 
seeking a fixed income would bid down, or bid up, the value 
of the rent-charges, which thus came to have a quotable 
market value. In time, greater and greater amounts were 
paid by the investors in return for the guarantee of a given 
income. In rural districts the value of the charges was low, 
that is, the capital sum was but ten or twelve times the value 
of the annual rent-charge ; while in the cities it rose to twenty 
and even twenty-five times the annual rent-charge, 

A memento of this practice, probably, is the manner in 
which the price paid for land is spoken of still in 
England and the continental countries in a phrase quite un- 
familiar to American ears, as a certain number of " years' 
purchase. ' ' If an estate is sold for twenty times the annual 
net rental it is said to be sold at twenty "years' purchase." 
This does not mean that the rental for twenty years only 



51] THE PURCHASE OF RENT-CHARGES 121 

is sold, but that the rental in perpetuity is sold for twenty 
times the annual rent ; that is, the land is sold outright for 
twenty years' rent paid at once. The estate is looked upon 
primarily as yielding a fixed income ; the value of the per- 
manent possession of the estate is thought of as a certain 
number of times the value of the income secured. "Years' 
purchase" means, therefore, the length of time required for 
the income to amount to the purchasing price. 

This attains the thought of the present value of the 
estate, or capital sum in it, though the capital sum is thought 
of as a multiple of the income, instead of the income being 
calculated as a percentage of the capital value. Now at the 
rate of "ten years' purchase" an investment of money in 
land affords an annual interest of ten per cent., as each year 
the rental is one tenth of the original investment ; twelve 
years' purchase yields eight and one third per cent., twenty 
years' purchase, five per cent., and twenty-five years' 
purchase, four per cent. Increase in the number of years' 
purchase corresponds to a decrease in the rate of interest 
which the original investment of money, the capital sum, is 
expected to yield. This is equally true whether the invest- 
ment be in the legal form of a purchase of the fee-simple of 
land, or in that of the purchase of a rent-charge. We are 
brought to this conclusion: that the present value of the 
rents in perpetuity, of any given wealth, is the capital value 
of the wealth ; and that the reciprocal of the number of years' 
purchase is the rate of interest that an investment is ex- 
pected to yield. 

4. The sale of rent-charges has gradually given place to purchase 
the modern form of money loan. The conditions of the con- ^°^.^^^°* 
tract in the sale of rent-charges were gradually changed for ges gives 
greater convenience. When the purchaser (the lender) was way to more 

" . modem con- 

given the right to require repayment of the capital sum at tracts 

the end of a specified time, the transaction was brought still 
closer to an ordinary loan. In this form, the sale of rent- 
charges is still found in southern Germany, but the greater 



122 THE CAPITALIZATION OF ALL FORMS OF RENT [CH. 15 

simplicity of the money loan, and of the sale outright, has led 
to the almost total disuse of the older form of transaction. 

The purchase of rent-charges was long looked upon as a 
very different thing from the loan of money, but to modern 
eyes it is not, and the old distinctions between the moralities 
of the two kinds of income appear now mainly quibbles, 
justified in a slight degree by certain social facts of the time. 
The rise of industry led to different ideas on the lending 
of money ; the prejudice against it weakened in large classes 
of the population, especially in Protestant countries, and its 
use rapidly spread. Not until 1830 did a decision of Rome 
remove all disapproval on the part of the church. Rent- 
charges are instructive now as showing the mode in which 
rents began to be capitalized in earlier centuries. 

§ II. CAPITALIZATION INVOLVED IN THE EVALUATING OF 

INDIRECT AGENTS 

The capital 1. The hui/ing of any indirect agent is practically the 

durabi"* purchasing of a "rent-charge." To account rationally for 

wealth is the market value of anything, its importance must be traced 

[tT exacted ^^*^^^ ^^ "gratification." We have examined and accepted 

rents the proposition that if a good is not affording enjoyment at 

the present moment it is kept because it will yield a rent 

until it is used. If it is never to afford direct enjoyment, 

if it is never to mature physically into the class of enjoyable 

goods, the explanation for its value must be found in the fact 

that it is capable of yielding a series of rents of enjoyable 

goods. In the last analysis the value of anything must be 

found in its power of affording psychic income, a series of 

psychic rents. Now when such a durable income is bought 

outright, what is the basis on Avhich its value is estimated? 

AAHiat other than the rents it will afford? Exactly as did 

the purchasers of a medieval rent-charge, the buyer of the 

durable wealth pays a definite sum in return for the right 

to enjoy a series of future rents. As was the case with rent- 



sMI] EVALUATING OF INDIRECT AGENTS 123 

charges, however, the amount paid will be less than the full 
matured value of the rents. A long series, even a perpetual 
series, may be exchanged for no more than ten, twenty, or 
twenty-five annual rents. AVhile therefore the selling value 
of the good is the sum of the values of the rents, it evidently- 
is that sum discounted. Immediately, when we have reached 
this point in the reasoning, our proposition must suggest 
itself as self-evidently true in this form: the value of any 
good is the sum of the entire series of rents it contains, 
discounted, at some rate, to their present worth. What 
determines the rate of discount is a question that will call 
later for a fuller explanation. 

2. There are two modes of approach to the problem of capital 
interest: one from the side of income (rents) ; the other, from ^*3"®>snot 

' ' \ / 7 7 1 primary 

the side of the hearer {capital). The rate of interest ex- 
presses a relation between two values, the value of the income 
and the value of the sum loaned, whether it consists of money 
or of other wealth expressed in terms of money. But which 
of these values is primary in a study of the causes of value ? 
Which is the base from which the other is derived by mul- 
tiplying at the rate expressing their ratio? The answer to 
this question cannot be a matter of indifference to the eco- 
nomic theorist. Universally heretofore the study of interest 
has been approached from the side of capital. A capital sum 
was said to be invested and to earn a certain interest, that is, 
per cent., of that sum. The usage of speaking of the invest- 
ment of capital as a sum given, and of "interest on capital" 
predisposes the mind to this view. 

But the approach from the side of income has been shown Expected 



I' 



rents are 



to be in some important cases the historical origin of the rat ^j^ 
of interest, and we need but reconsider reasoning that has and capital 
gone before to see that this is the logical order in all rf'^^Js-^''^ 
cases. Rent, or income, is a link in the chain of value, purchase" 
connecting gratification or psychic income, consumption 
goods, rent or usufruct value, and finally capital value. To 
one keeping in mind the logical cause of value, it becomes 



124: THE CAPITALIZATION OF ALL FORMS OF RENT [CH. 15 



The rate of 
capitaliza- 
tion of rents 
is not iixed 
merely in 
commerce 



inconceivable that capital value could precede income, a 
view possible only when a fragment of the problem is seen. 
This being true, the mere mention of a capital sum implies 
the interest problem, and assumes the interest rate. The 
capital is of that amount because the anticipated incomes, 
discounted at some rate, equal that sum. The capital sum 
is a certain number of years' purchase of the series of rents 
which can be secured by the use of wealth in various indus- 
tries. The owner of a number of dollars (or of an amount 
of other wealth expressed in dollars) has open to him 
various investments. The value of any wealth is due to the 
possibility of deriving incomes from it. If, however, the 
expected income fails to be realized, the capital loses its 
value, or it is revalued on the basis of the new rents. The 
investment is then said to be a losing one. Thus, at each stage 
in the valuation of capital, before it is invested and at every 
moment thereafter when the valuation is readjusted to the 
rents realized or expected, rents are logically primary, the 
source from which the capital sum is derived. 

3. T/(e capitalization of comparatively safe permanent 
incomes from real estate contains within itself all the factors 
for the independent determination of the interest rate, and 
is not to he explained merely hy reference to "the prevail- 
ing rate of interest " in other investments. The value of 
land usually is explained simply as the capitalizing of its 
rents at " the prevailing rate of interest." The rate is 
assumed to be fixed by conditions in manufacturing and 
commerce, and if five per cent, can be gotten there the 
capitalist would never buy land unless investment in it 
were made equally attractive. The cause of the rate thus 
is supposed to rest outside the transaction itself, the exchange 
of land for other capital seeking investment. The economic 
student is safe in assuming always that explanations of this 
sort are fallacious. The cause of value in any one exchange 
or any one industry is not thus to be juggled and shifted into 
another industry. It is true that the values of goods are so 



5 IT] EVALUATING OF INDIRECT AGENTS 125 

wonderfully interrelated by substitution that as the price 
of fresh beef will affect that of salt mackerel, so the capitali- 
zation rate of machinery affects that of land ; but the influ- 
ence is not from one side only, it is mutual. When anything 
has value, it must have in itself an independent cause of 
value. 

It can not be otherwise in the particular problem of value The ex- 
called capitalization. The first task of scientific study is ^^"^resent 
to state clearly the nature of the problem. In this case it and future 
is seen to be the exchancre of a present sum of wealth for ^^"^^ '^^^"ij^s 

^ ^ ma rate of 

a series of future rents. AVhenever there are income-bearers timedis- 
and buyers and sellers of them, there are the conditions ^°"°* 
required for the determination of the market rate at which 
those future incomes shall be discounted. Manufactures 
and commerce have no peculiar relation to this process. By 
a flight of scientific imagination we might assume that the 
stock of indirect agents in the world consisted only of nat- 
ural food producers, and that this stock and its yield were 
absolutely unchangeable by man's will or efforts. Each 
man in such case would have to stand with hands tied, and 
take the fruits as they matured. Even in such a case there 
would be capitalization and a rate of discount on future 
rents. The fruit-tree (that is, the whole future series of 
fruits) would bear a certain relation to one year's yield; 
the field would bear a certain relation to its crop. Wherever 
there are buyers and sellers of more or less durable agents 
of it matters not what kind or origin, there are present the 
elements and causes for the fixing of a rate of time discount. 

4. In practical business may he seen innumerahle in- capitaiiza- 
stances of the capitalizafion of both permanent and limited p°°gj„^j 
series of incomes. The simplest case is the capitalization of uniform 
an unvarying and supposedly perpetual series of rents. 
Whatever the rate of time discount prevailing, rents infi- 
nitely distant become infinitesimally small when discount is 
compounded. Thn present rent is worth most, next year's 
less, and so on in a decreasing series. 



series of 
rents ; 



126 THE CAPITALIZATION OF ALL FORMS OF RENT [CH. 15 



Of a pro- 
bably in- 
creasing 
series of 
rents; 



And of a 
declining or 
fluctuating 
series of 
rents 



Mode of 
fixing the 
rate of time 
discount in 
practical 
business 



But social changes alter rental values, and so far as these 
changes are foreseen, these anticipated or expected rents are 
made the basis for present capitalization. Investors and 
owners alike may foresee that a piece of land used only for 
agriculture will, within a few years, be taken up for city 
lots, or will be needed for a factory or as the site of a rail- 
road station. The capitalized value would not in this case 
be based upon a series of uniform rents each of the amount 
yielded annually now, but on the progressive series expected. 
In some cases the physical output of an agent may decline 
while the price of the product increases. Modern foresters 
foresee that the selling price of the timber will be greater 
twenty-five years from now than it is to-day, and they there- 
fore estimate the rental value of the forest on the basis 
of the future price, thus justifying expenditure that would 
be unwise if present prices were to continue. 

Again the expected series of incomes may be declining, as 
the royalties (not typical rents) secured from mines. If the 
income is expected steadily to fall, and to disappear at the 
end of the twenty-fifth year, the value of the mine would 
be the capitalized sum of a limited and degressive series 
of incomes. 

Every exchange of a durable agent involves an estimate, 
rough and imperfect it may be, of that agent's future. 
The practical men, however, who are thus fixing the ' ' capital 
value " of goods, are usually only dimly conscious of the 
logical nature of the process. In fact the process goes on 
in a way much less analytical and conscious, much more 
empirical, than this analysis would indicate. Most men 
simply buy as cheap as they can the agents which at the price 
they believe will add most to their income. The future 
changes are only roughly, not accurately estimated. The 
shrewd bargainer is the one who foresees more clearly than 
his fellows the complex changes to come. Other men blindly 
follow. The ability and the inability to foresee such changes 
make men rich and poor. In all this bidding for capital 



§111) CAPITALIZATION IN MODERN INDUSTEY 127 

the logical basis of the value is the series of rents. When 
the agent is bought outright, the very concluding of the 
bargain fixes a relation between the expected value of the 
income and the value of the capital invested. In other 
words, the exchange of durable agents virtually wraps up 
in them a net income, which it is expected will unfold year 
by year when rents mature and are secured. At the 
moment of the investment, the expected rents are expressed 
as a percentage of the capital sum. 

§ III. THE INCREASING ROLE OF CAPITALIZATION IN MODERN 

INDUSTRY 

1. Where a system of exchange is highly developed, Asexchange 
things are looked upon as capital yielding an objective in- increases 
come rather than as ivealtJi yielding immediate means of tionof goods 
enjoyment. In the old organization of industry most men ^^on^^s 

•' ^ ... . . more usual 

got most of their living from the things they raised or made. 
At the present time goods are gotten in the most indirect 
ways ; men seek wealth because it will yield them an objective 
or money income, knowing that if they can get the income, 
they can get other things by exchange. In business 
to-day, wherever there is a rental, it is capitalized, has a 
market value, is bought and sold. Men compete in the 
purchase of income-yielding agents. There is a con- 
tinual contest in judgment among investors to secure the 
largest rent for the smallest outlay. On the other hand, the 
owners of any rental strive to secure the largest capitaliza- 
tion for it that they can. In this market for capital it is 
money rents that are exchanged as an indirect means of 
arriving at gratifications. 

2. The issue of capital stock is the putting of the incomes various 

of wealth into marketable form. Stock companies, or cor- ^indsofcor- 

' ... poration se- 

porations, are business enterprises which issue stock, or cer- cuntiesput 

tificates of a share in their wealth and income. Doubtless expected in- 
comes msai- 

the convenience of the sale and transfer of invested capital able form 



128 THE CAPITALIZATION OF ALL FORMS OF RENT [CH. li 



Any con- 
tinuing in- 
come can be 
capitalized 



by the use of stock, has been one of several reasons for the 
large increase of this form of organization during the past 
century. Originally the stock of a company taken collec- 
tively represented all the capital invested, and each share 
entitled the owner to a given portion of the total income 
earned. The shares were issued in regular denominations in 
terms of money, and this amount expressed on the face of the 
stock remained fixed. But as a business proves more or less 
profitable, the value of a share of its income rises and 
falls regardless of the original amount of stock issued. At 
once there is a divergence between the nominal or face value 
and the market value of the stock. The nominal value is 
relatively permanent, the same year after year; it may in- 
crease by further issues, but rarely is it decreased. But 
when stock is the only form of claim on the earnings that is 
issued, the fluctuations of the market value of the stock 
record the real value of the business, that is, the capital 
value of the rents it is expected to yield. But in present 
practice there are several forms (of which stock is but one) 
in which an investor may buy a share in the earnings of a 
business. Bonds usually do not give their owner a vote in 
the management or make him in the technical legal sense 
a part owner in the business. Bonds representing money 
loaned to a company, and entitling their holder to regular 
interest payments, are nearest in form to the medieval rent- 
charge. Next stands preferred stock, which entitles the 
owners to share first in the dividends, if there are any; and 
finally the common stock, which gets a share only when the 
other claims are satisfied. By the multiplication and further 
variation of these readily salable claims on industrial in- 
comes, the needs and desires of investors are met more fully 
and with greater precision. 

3. Me7i seek to convert into marketable capital any in- 
crease of income in tlteir wealth or business. A man who 
invests a given capital sum in machines, buildings, and ma- 
terials buys them, as others do, at prices that represent their 



UII] 



CAPITALIZATION IN MODERN INDUSTRY 



129 



usual, or market, earning power. If he succeeds excep- 
tionally in his business, he makes the capital earn more than 
the rents on which it was capitalized. The same material 
wealth becomes worth more because of the reputation of his 
products, and therefore the trade-mark and good-will of the 
business can be capitalized. In this sense a good name can 
be sold, and is at least as much to be desired, even in a 
mercenary age, as great riches. Likewise, social changes, 
new needs, the growth of population, increase the net income 
of wealth, or the rents of a business. The basis of capital 
value is income, and whatever be its cause, political or 
economic, material income can and will be capitalized and 
added to the market value of the privilege, wealth, or in- 
dustry on which the income is conditioned. 

Notable cases of this sort arise in connection with public The capital- 
franchises. If a street-railway or a gas-company is given the franchises 
exclusive right to operate in a given locality, any income forpubuc- 
above average interest on the investment is capitalized either coronations 
in the higher price of the stock or in additional stock issued 
without the addition of any material to the plant. If the 
franchise is unlimited, the income may be capitalized as 
practically perpetual ; if the franchise is limited, and is to 
expire in thirty or forty years, only the limited series of 
privileged incomes can ordinarily be capitalized. When, 
however, the managers are able to exert influence enough 
to have the franchise extended, and the investors believe in 
the skill of the managers and perhaps in their power to 
l)ribe the legislators, the value of the stock continues higher 
than it could usually be under a limited franchise. Such 
circumstances becloud the question whether the exceptional 
income arising under the franchise should go to the public 
or to the company. Granted, however, that the company is 
entitled to the income, the burden of proof is on those who 
object to the capitalizing of the income as is d(me in every 
other business. 

4. TJie manipulation of dividends and ike rcsidtiiu/ 

9 



130 THE CAPITALIZATION OF ALL FORMS OF RENT [CH. is 



Some diffi- 
culties in 
the capital- 
ization of 
corporate 
incomes 



changes in capitalization open up great opportunities for the 
dishonest increase of private fortunes. A great change 
in the market value of stock is made by a comparatively small 
change in the income it regularly aft'ords, for if the prevail- 
ing rate of interest on money loans is five per cent., each 
dollar of dividends is capitalized at $20. It might seem that 
the dividend would be declared if earned, otherwise not. 
The matter is not so simple and impersonal, however. The 
control of corporations is vested in the hands of a small 
group of directors who have both the opportunity and the 
temptation to withhold dividends when they are earned, to 
pay them with borrowed money if unearned, and in either 
case to keep the stock-holders and the public in ignorance of 
the real condition and earning power of the business. The 
stocks can, by this manipulation of dividends, be made a 
lottery for the legitimate investor, a trap for the unwary, 
and a source of unrighteous gain by men recreant to their 
trusts. 

In this way it may be seen that an earning power not 
known to bidders in the market does not enter into capitali- 
zation; a fictitious earning power, however, is capitalized so 
long as the investors continue to be deceived. Instances 
of this kind present problems not only of private morality, 
but of the preservation of free industrial institutions. The 
solution of these problems would perhaps be hastened if the 
economic nature of capitalization were more clearly under- 
stood. Capital value in modern industry is everywhere the 
expression of the serial rents of wealth, discounted at a 
prevailing rate of time discount. 



CHAPTER 16 
INTEREST ON MONEY LOANS 

§ I. VARIOUS FORMS OF CONTRACT INTEREST 

1. Interest, the amount paid according to contract by one Distinction 
person to another for credit qiven in terms of moneii, is but ^®t^^° . 

' . ^ / ^j contract in- 

one expression of a larger problem, that of the difference terestand 
in present worth of goods at two periods of time. This *V°^-^*^"^^ 
larger problem appears under several forms: first, as a dif- 
ference in value, due to time, where there is no money 
expression (to be considered in the following chapter) ; 
second, in discount on a money loan for a short, definite 
time; third, in a long-time money loan at a fixed rate of 
interest; fourth, in a credit loan — that is, the sale of the 
thing on credit in terms of money. 

The last three cases involve interest more or less clearly. 
Time-discount, as will be more fully explained, is the basis 
of interest. The interest may be greater or less than the 
time-discount in i\\% goods, owing to miscalculation on the 
part of the borrower or to an Mrforeseen change in the 
conditions. Men bid for the use (^^^Ktth with the intention 
of repaying it at some future tii^^^nd the interest they 
agree to pay is based on their estimate of the discount of 
future rents, which they think is involved in the present 
valuations of the goods. Time-discountTs involved in goods, 
however, in numberless cases where there is no contract in- 
terest. Even a Robinson Crusoe must recognize in his 
consumption goods and in his various indirect agents differ- 
ences in value at different periods of time, of which he must 
take account. 

131 



132 



INTEREST ON MONEY LOANS 



[CH. 16 



Risk and 
expenses to 
the money- 
lender 



Short-time 
loans by 
discounting 
of commer- 
cial paper 



2. Gross interest must he distinguished from net interest. 
'ilie forms of wealth yielding incomes are so mutable, and 
are used under such complicated conditions, that both in 
theoretical discussion and in practice much care is needed 
to distinguish between the yield attributable to the income- 
bearer, and that attributable to other wealth or services used 
in connection with it. That the sum paid as interest 
on a loan contains other elements is recognized constantly 
in practice. As in the case of contract-rent allowance must 
be made for repairs and depreciation, so in the case of 
contract-interest allowance must be made for risk, or the 
average loss occurring in the industry. Money loaned in) 
hazardous ventures must yield a higher rate of interest] 
Likewise capital used by the owner in a hazardous venture 
must frequently earn very high returns (not all logically 
interest) to offset the losses that are likely to occur. 

The lender must also, in estimating net interest, count the 
cost of placing, supervising, and collecting the loan. A 
pawnbroker lends only small sums and spends much time and 
effort to keep at interest a moderate capital. Five thousand 
dollars loaned in sums averaging ten dollars represents five 
hundred transactions, and yet if placed at five per cent, 
it yields but two hundred and fifty dollars a year. While, 
therefore, the borrower of a small sum estimates the eco- 
nomic advantage (or anticipated gain in income) even higher 
than the oppressively high contract-interest lie may be forced 
to pay, the lender must credit a large part of the gross 
interest to the labor he expends in carrying on the business. 

3. The most usiial form of sli.ort-time loan is that made 
by a hank or broker to business men on security of com- 
mercial paper. By commercial paper is meant promissory 
notes given by customers of the merchants, bills of lading 
for goods that have been shipped to their customers, and 
various other evidences of indebtedness that may be offered 
the banks for discount. When goods have been sold on 
time (as thirty, sixty, or ninety days) the seller has the 



sW] VARIOUS FORMS OF CONTRACT INTEREST 133 

choice between letting the time expire and collecting the bills 
direct from the customers, and discounting the bills for 
ready money at the bank. According to the conditions and 
needs of the particular business, either method may be 
chosen. In most industries there is need for larger capital 
at the seasons when the product is put upon the market. 
The merchant or manufacturer plans his business in the 
expectation of an average rate of discount at such times, and 
if it chances that the discount rates are abnormally high, 
he has no choice but to go on borrowing and paying the high 
interest out of the expected profits of his business. This 
risk of a change in the interest rate is one of many chances 
he has to run. 

4. 3Iost debts in modern times are outstanding for a Long-time 
term of years and represent the lender's purchase of a claim i°^°^^y 

_ . ^ . . purchase ot 

on the earnings of some productive entei'prise. The simplest mortgages, 
forms of long-time loans are those made on the security ^"^^j^^g' ^""^ 
of real estate, which is mortgaged to the lender for the 
term of the debt. Usually the debtor is obliged to pay the 
interest either annually or semi-annually, and often, but 
not always, is permitted to reduce the principal by partial 
payments. These real-estate mortgages rest on the security 
of the particular mortgaged wealth, and, unlike most short- 
time loans in bank, are not personal obligations resting on the 
general credit of the borrower. Most other long-time debts 
share this character of being non-personal ; if payment is 
defaulted, only the particular wealth can be sold for pay- 
ment, not the general wealth of the borrower. Corporation 
bonds, issued by railroads and other large stock companies, 
have increased greatly in number in recent years. They 
yield an income fixed in advance, and are secured usually by 
mortgage on the entire property of the corporation issuing 
them. The income of some special kinds of " preferred 
stocks " is .so guaranteed as to make them for investors 
substantially the same as bonds. Another large class of 
long-time loans are those made by national, state, and local 



134 INTEREST ON MONEY LOANS tCH. 16 

governments. Tens of billions of dollars of public debts are 
now outstanding, held by private investors in every walk of 
life. 

The contract in the case of each kind of these loans pro- 
vides for a fixed term after which the borrower must repay 
or renew, and for a fixed rate on the nominal or par value 
of the loan. Nearly all the securities (bonds, certificates, 
evidences of indebtedness) are salable at a market rate. It 
is therefore the income that is fixed, the selling price (or 
capital value) fluctuating above or below the nominal sum 
except just at the moment when it is payable. The long- 
time loan thus is very similar in its economic character to 
the old-time rent-charge. 
The cost of 5. The sale of goods on credit is a mode of lending and 
ta^rov^ent ^"^'^^^^^ interest in a disguised form. In some cases mer- 
buyer chants will not sell cheaper for cash than for credit, for 

fear of offending their main body of credit customers; but 
this is exceptional, as there are good reasons why such a 
difference should be made. The credit sale usually involves 
interest, and often at a very high rate. In many stores 
there are two appreciably different prices, one for "slow 
pay, ' ' the other for ' ' spot cash. " If a bill paid at the end of 
the month is five per cent, more than the cash price, the 
difference is equal to sixty per cent, per annum for the priv- 
ilege of postponing payment. Such a rate of interest is paid 
only by the improvident, but that is a large class ranging 
from factory workers to college students. The cash dis- 
counts allowed by merchants clearly express the time dif- 
ference. On fifty to one hundred dollars of outstanding 
bills, many perfectly honest persons are paying interest at 
the rate of seventy-five per cent, per annum. The merchant 
is forced to make this difference because he must seek not 
only to earn interest on the capital thus invested, but to 
recover the costs of bookkeeping and collections, and the 
risk and loss of unpaid bills. The discounts allowed by man- 
ufacturers and wholesale houses measure in the same way 



§11]. THE MOTIVE FOR PAYING INTEREST 135 

the difference between cash and credit sales. Not unusual 
is a discount of "six per cent, in ten days, five per cent, in 
thirty, or sixty net." The buyer allowing his bills to 
run for two months (six per cent, for sixty days) pays 
thirty-six per cent, per annum for the use of that money. 
The difference is so great that it is impossible to carry on in 
this way a large business against strong competition. Such 
purchases on credit frequently are made, however, by dealers 
in small towns. 

6. Interest is often concealed under other forms which Evasion of 
increase the apparent rate. This fact is well shown in the |s2^''^teof 

^ ^ interest 

ways by which usury laws fixing the legal rate of interest 
are evaded. A simple method is for the lender to charge a 
commission for making the loan, or, if it is a bank, to charge 
for a pretended cost of exchange to bring the money from 
some other city. Sometimes the borrower is required to keep 
larger deposits with the bank than he voluntarily would. 
Needing $5000, he is compelled to borrow $10,000 and to pay 
interest on twice as much as he is permitted to use. Again 
the borrower, in periods of unusual demand for money, is 
forced to make a long loan instead of a short one. When 
a one month's loan at ten per cent, would meet his need, 
he is forced to borrow for twelve months at six per cent., 
during ten months of which time four or five per cent, is 
the prevailing rate. In these and other ways the real rate, 
or burden of the loan, is made different from that which is 
expressed. 

§ II. THE MOTIVE FOR PAYING INTEREST 

1. Interest for loans to ohtain consumption goods is Money 

paid because they are felt to have greater importance at the ^"7°^^ 

moment than an equal amount {either of goods or of money) sumption j 

will have in the future. A sudden stress of misfortune may ^^^ j 
impart to a thing at the moment far more than its usual 
value. One standing face to face with starvation cannot 



136 



INTEREST ON MONEY LOANS 



[CH. 16 



Money 
borrowed to 
buy indirect 
agents 



be worse off a year hence ; often there is good ground to hope 
that if the present misfortune can be relieved, the future 
better fortune will make it possible to repay a loan with 
interest. In other cases, the object of a loan of consumption 
goods is to increase the future earning-power of the bor-, 
rower. When the student borrows money that represents 
to him food, clothing, text-books, tuition, and other expenses 
incidental to a course in college, the expenditure is intended 
to increase the effectiveness of the worker. When he bor- 
rows he has little earning-power, but with that faith in 
himself which makes the young American so interesting, he 
pictures himself four years later, sheepskin in hand, drawing 
a munificent salary with which he can easily satisfy the most 
exacting Shylock. Such an expenditure is sometimes called 
" an investment of capital," but it should be called a con- 
sumption loan — nevertheless in many cases a loan wisely 
made. To call this an investment of capital is to confuse 
man, the end of production, with material means. 

Sometimes this higher estimate of the present good is un- 
wise, viewed in the light of wider experience. Goods that 
meet momentary desire make an exaggerated appeal to 
untrained minds. The child, the spendthrift, the savage, 
cannot properly estimate the relative values of present and 
future. The improvident sometimes lightly agree to pay 
an exorbitant interest for an immediate consumption loan, 
making a ruinous difference between present and future 
gratifications. 

2. Interest on indirect agents is paid as a more or less 
indirect means of securing gratification. This can be clearly 
seen when durable agents are hired that produce gratification 
directly. A carriage bought with borrowed capital and used 
for the pleasure of the borrower is expected to aft'ord a 
utility greater than that to be gotten by the amount of the 
interest in any other way. A spade bought with borrowed 
capital and used to cultivate the owner's garden is expected 
to add products of greater value than the interest. 



ill] THE MOTRT: for paying interest 137 

But how is it in case the agent is used to gratify persons 
other than the owner? The rausic-teacher who buys a piano 
on credit expects to increase his earnings by a sum greater 
than the interest he has to pay. If the addition to his 
earnings exceeds the interest charge, it is because he has 
found a use for the borrowed capital greater than that on 
the basis of which it was capitalized in the market. The 
amount of the interest is secured through the pleasures and 
services the piano affords to the patrons of the teacher. In 
the most complex cases of the borrowing and use of indirect 
agents, there is ultimately this same basis for the interest: 
enjoyment afforded by the use of capital in the partic- 
ular period. To the borrower, what the capital makes 
possible is an addition to his income as great as, or greater 
than, the prevailing interest. Most loans in our society 
are now of this sort. Money is borrowed to invest in busi- 
ness, to get better machinery or a larger stock; with this 
capital is secured a better or larger product, and the product 
finally being sold at a profit, the business man is at a point 
where he can satisfy his wants Mdthout encroaching on his 
capital. Logically, therefore, the consumer of the product 
pays the interest in the price, and the final consumer's en- 
joyment must be deemed the logical source of the money 
interest. The borrower's motive for paying interest on these 
indirect goods evidently is his hope of profit through realiz- 
ing a greater money rent than he has contracted to pay for 
their use. 

3. The money marJiet in which short-time loans are made The special 
is peculiar in that the money frequently is borrowed to pay *^*®^°^ 
debts, not for investment. In beginning the discussion of rowed to 
interest, it always is remarked that it is not money, but cap- P^y^^^'ts 
ital, that is borrowed and loaned. This caution against the 
superficial errors that so easily beset the popular discussion 
of interest is much needed, but it is well to note a peculiar 
case which is apparently in contradiction to this statement. 
The usual method by which money is loaned in the great 



138 INTEREST ON MONEY LOANS [CH. 16 

"" industrial centers is called discount, which is the exchange 

of a certain sum of money for a note or other credit paper 
of a larger amount, the interest thus being taken out in 
advance. Much borrowing in the form of discount is for 
the same purpose as other borrowing— to acquire control of 
more productive agents, to embark on new enterprises. The 
peculiarity of the discount money-market is that an unusual 
number of loans are made to meet contracts that have al- 
ready been made. There is always a great mass of out- 
standing obligations, and merchants are compelled to renew 
these loans on penalty of bankruptcy. This market for short- 
time loans is not connected closely with the general market 
for loanable capital. "When the need is for ready money, 
other concrete capital cannot flow in to meet it. This special 
money demand, therefore, in time of greater or less stress, 
may fluctuate rapidly, and the interest rate be temporarily 
higher or lower than the rate on long-time loans. This case 
is similar to that where two markets, as a retail and a whole- 
sale one, exist side by side, but slowly exerting a mutual 
influence. 
Productive 4. In the long-time money loan the money generally is 
borrowers jjorrowcd first merely as a medium of exchange to get con- 
on their trol of indirect agents. The borrower of a long-time money 
mente' ^^^^ ^^^ productive purposes is always seeking to gain by 
investing the money in wealth that will yield an income 
larger than the interest he must pay. The borrower, there- 
fore, invests in view of the rate of interest, of the market 
price of the goods in which he plans to invest, and of the 
probable chances for earning profits in the business. 
This case, where certain goods whose price is known are 
approximately selected before the money is borrowed for 
investment, is the type of loan to be kept most usually in 
mind in economic discussion. 

Evidently the price of these goods, to control which is the 
real object of the loan, is merely the sum of the expected 
rents they will yield, capitalized at the prevailing rate of 



,WI] THE MOTIVE FOR PAYING INTEREST 139 

time-discount. The borrower expects either to make these 
particular goods earn rents larger than those on the basis 
o'f which they have been capitalized, or to transfer them to 
an economy where goods are capitalized at a higher rate 
than he is paying. The income yielded by these goods, if the 
borrower's expectation is fulfilled, is but the difference be- 
tween present and future rents that has been wrapped up in 
their capitalization. . As time elapses and the rents emerge 
in wisely chosen investments, the borrower has a surplus 
large enough to pay the contract interest. It appears, there- 
fore, that the motive of the borrower is to get control of 
future rents at prices that already involve, in their capitali- 
zation, a rate of discount somewhat greater than the interest 
he contracts to pay. 

5. The rate of contract interest on money loans is ad- Thede- 
justed at each moment in the money market hy the bidding ^ark^for 
for money loans. This is a true statement only if it is under- moneyioans 
stood in a somewliat superficial sense. No error connected 
with interest is, however, more crude than the view that the 
interest rate is in any broad sense due to the quantity of 
money. Some loans are made apart from the general mar- 
ket, by private agreement between borrower and lender; 
but in nearly every such case the rate agreed upon is seen 
to be closely related to that of the general market to which 
either borrower or lender can resort if he wishes. The 
greater number of borrowers and lenders of money have a 
range of choice in their bargaining. The interest rate in 
modern developed money markets is that rate which brings 
to equilibrium the demand for money loans and the money 
i-apital available within the period. If the ready, loanable 
money in private hands, in banks, in insurance-company re- 
serves, &c., increases, a lower rate must be offered to bor- 
rowers; if the supply decreases, a higher rate will be quoted. 
In the one case, more men borrow ; in the other, fewer borrow 
and more seek to lend. Thus a rate results, but a rate that 
is closely conneetcd with a larger set of facts— those, indeed, 



140 INTEREST ON MONEY LOANS [CH. 16 

which determine in the long run the rate of capitalization 

in the community. 
Every per- 6. The individual must adjust Ids business dealings to 
!°°'^^ the market rate of interest. The market rate is fixed by the 

buyer or a ' 

seller of bidding of individuals, and every one has something to do 
''ocTs"* ^^'^^^^ fixing it. In a multitude of minutely small ways, as 
present and future goods are compared by men, the rate 
of interest is affected positively or negatively. But for 
practical purposes the individual, counting for little in the 
midst of millions, must look upon the interest rate as beyond 
his influence. Therefore, while the rate is determined by 
each to some degree, all that any one does is to buy or sell 
present goods, borrow or lend capital, use up or save wealth, 
according as his own estimate of time-value is less or more 
than the market rate. In fact, the estimates of individuals 
diverge constantly from the market rate, but are brought 
into harmony by their actions with reference both to money 
loans and to the use and valuation of the various forms of 
wealth. A Robinson Crusoe working on his island and 
valuing future goods relatively to present goods higher than 
before, consumes less ; or, valuing them lower, consumes 
more. The business man who values indirect agents above 
the market rate borrows, and if he miscalculates and fails to 
make them earn the expected rent, he loses. In this experi- 
mental way many other acts are influenced by the prevailing 
interest rate and in turn affect it, thus aiding to formulate 
society's estimate of the value of present as compared with 
future rents. 



CHAPTER 17 
THE THEORY OF TIME-VALUE 

§ I. DEFINITION AND SCOPE OF TIME-VALUE 

1. Time-value is the difference hehveen the values of Thesim- 

things at different times. Things differ in value according to P'^st cases 

. " "of time- 

form, place, quality of goods, and according to the feelings value 

of men, and — not least important factor — according to time. 

The simplest and clearest case of time-value is the difference 

noticeable in the same thing at different moments. Is this 

good worth more noAv or next week? Shall this apple be 

eaten now or next winter ? These questions can be answered 

only after comparing the marginal utilities which differ 

according to the varying conditions of the two periods. 

All the other cases of time-value can, by the practical 
device of substituting other goods of equivalent value, be 
reduced to the typical case of comparison of the same thing 
at different times. The comparison may be between very 
similar things, the one consumed being replaced by a du- 
plicate. An apple borrowed now may be returned next year 
in the form of one of the same size and quality. The essen- 
tial thing in this comparison is not physical identity, but 
equivalence in size, sort, and quality at the two periods. 
This is borrowing under the renting contract. 

But two or more quite different things may be expressed Time-vaiue 
in terms of another thing and so be made comparable, ^j^ggfent 
]\roney becomes the value-unit through which different kinds of 
Ihiiigs may be reduced to the same terms for comparison, ^j^^^^ ^*' 
With this mode of expressing the value-equivalence of vari- 

141 



142 



THE THEORY OF TIME-VALUE 



[CH. 17 



Time-value 
is involved 
in capital- 
ization of 
land 



ous goods, the interest contract first becomes possible, money 
(the standard of deferred payments) being the thing ex- 
changed (possibly only in name) at two periods of time. 
What is really compared are various gratifications which 
may be produced by very different material things or ser- 
vices. In its last analysis comparison of values at different 
periods of time must be a comparison of psychic incomes, of 
two sums of gratification. The comparison of the value of a 
bushel of apples with that of a barrel of potatoes or a suit 
of clothes at the same moment appears simple enough. 
When all are expressed in terms of money, the comparison of 
each with its value-equivalent at a later date becomes 
easy. The simplicity and obviousness of time-value in the 
case of money loans at interest led men at first to recognize 
that phase of the problem exclusively, and later the term 
" interest," not without much confusion of thought, was 
given a wider significance. Let us now see how large a part 
of the whole problem of time-value is outside of the money 
loan. 

2. The prohlem of time-value is quite separaMe from the 
concepts of money and capital, though usually connected 
with them in practice and theory. It is true that the problem 
of time-value was first clearly recognized in connection with 
money and a formally expressed capital sum. Misled by 
this fact, and taking a very narrow view, writers seventy- 
five years ago recognized but dimly the problem of time- 
value in connection with the valuation of the incomes de- 
rived from land. It is true, as has been shown above, that 
the mere putting of an estimate on a durable good such as 
land involves the process of capitalization, which in turn 
implies a comparison of the values of the rents expected 
at different periods. Diminishing returns in the use of 
agents involves a loss of time to secure the usufructs emerg- 
ing. The relation of these facts was not clearly seen until 
of late. 

The phenomenon of time-value as above defined may be 



§1] DEFINITION AND SCOPE OF TIME- VALUE 143 

seen to be broader even than that of capitalization. The 
difference in the value of the successive rents of wealth 
must have been recognized and in some degree measured 
before there was any conscious calculation of capital value. 
Differences in value due to time are everywhere. The prob- 
lem of time-value often is present where money is not even 
spoken of or thought of. JNIoney no more causes this time- 
difference in value than balances cause weight. 

3. The problem of time-value is involved in repairs and Time-vaiue 
depreciation, and in the use of consumption goods. It is is taken ac- 
possible, as we have seen, to increase the sum available for the keeping 
present needs, and to encroach upon the future by postpon- "po* repairs 
ing repairs on intermediate goods. The balancing of the 
cost of repairs against the future income is a never-ending 
task in practical business. One making repairs must pur- 
chase the needed materials and labor at a capitalization 
determined by their expected earning-power in other in- 
dustries. If the repairs in question will not ensure an annual 
saving as great as this expected rent, they will not be made. 
When an industry is declining, it may, for the sake of 
putting the capital into a better business, be good policy 
to let the machinery fall into bad repair. The problem of 
time-value is involved in the application of one's energy 
to repairing one's own possessions. It is a thought of wide 
bearings that numberless minor decisions in every petty 
business involve, if they are correctly made, a measuring 
of the rate of capitalization. 

As will be more fully shown in discussing the relation of And in the 
the prevailing rate of interest to saving, the recognition '^^°^''g°4*°" 
of time-value is implied in the use men make of consumption 
goods, in their postponement of enjoyment, in their storing 
of goods for future use. The varying gratifications yielded 
by consumption goods, and their values in different con- 
ditions cannot be explained without taking account of 
differences in time. Wherever there can be a choice in the 
time at which, and consequently in the conditions under 



144 



THE THEORY OF TIME- VALUE 



[CH. 17 



Prodigality 
and vice in- 
volve a high 
discount of 
future 
happiness 



which, a thing can be used, there is a choice presented be- 
tween the different values. Time-value is present even in 
a period during which no goods continue to exist, as when 
a good is consumed at a moment of greater need, to be 
replaced at a time when less valuable. If an apple is bor- 
rowed on the promise to return an apple and a peach at the 
end of a year, the peach represents the time-difference in 
value but in the meantime there has been no apple in exist- 
ence. It is only in a figurative sense that it may be said 
that interest is paid on that " capital." Interest is paid 
because of a difference in want-gratifying power, but during 
the interval there is no material capital. 

4. The prohlem of time-value is involved in much foolish 
pleasure, in prodigality, and in vice. Economics touches fre- 
quently on the borders of ethics. If there were to be formu- 
lated an economics of personal conduct, it surely would give 
a large place to the comparison between present and future 
pleasures. Forethought, or prudence, is the virtue of 
recognizing not only future dangers to be avoided, but the 
greater future joys to be gained in exchange for present 
pleasures. The reckless and the prodigal underestimate the 
future and barter all to gratify the moment's impulse. The 
drinker exchanges the hopes of worthy life for the exhilara- 
tion of the spree. Indulgence in social pleasures, if secured 
at the price of lost sleep, weakened health, and debauched 
character, are loans from the future made by youthful 
prodigals at usurious interest. If no one ever paid more 
than a moderate rate of interest for the gratification of his 
present whims and impulses, most hospitals, drug-stores, 
and medical colleges would close, and half, if not all, the 
prisons would be empty. 

Indeed, time difference in value is a universal phenomenon 
of life and conduct. Contract interest is but one phenomenal 
form of time-value, and this in turn is but one phase of 
value. This section may serve to suggest how much more 
varied and pervasive the fact of time-value is than has 



§11] ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 145 

usually been recognized in popular or economic discussion 
of the subject of interest. 



§ II. THE ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 

1. The fixing of the discount on future goods is, in its es- Theex- 
sentials, like the fixing of the market price of consumption ^^f^f 
goods. This problem appears to be one of the most difficult present and 
in economic theory; but reduced to its simplest terms, it is ^^'^^'^^s*^^ 
an aspect of exchange value, and its ultimate explanation 

must be found in a comparison of psychic incomes. There 
must be noted the conditions of demand and supply, the 
interplay and final equilibrium of the two forces. The de- 
clining and marginal utility to the two parties to exchange 
must be carefully analyzed. One who can do these things 
is prepared to find the answer to the problem of time-value. 
Whenever a group of buyers and sellers meet, a ratio of 
exchange commonly will be arrived at. The ratio of ex- 
change between buyers and sellers of present and future 
rents likewise is fixed at the estimates of a " marginal pair," 
at which point the amount offered and taken comes to equi- 
librium, for at that point no motive exists for any one to 
change sides. 

2. Time-value as the premium rate on present goods is Thepecuiiaj 
unlike the ordinary market price of goods only iri the special theex- 
nature of the utilities exchanged. The one peculiar need in change in 
the theory of this subject is a clear understanding on this time-vaiue 
point. The goods exchanged, or compared, are direct and 
indirect goods, or present and future goods, or, more gen- 
erally speaking, two goods or groups of goods unequally dis- 
tant in time from present enjoyment. What are sold in a 

case such as capitalization, involving an estimate of time- 
value, are present goods or gratifications; what are bought 
are future gratifications, or indirect agents which stand for, 
typify, or make possible, future gratifications. Practically 
every man in a market acts on the knowledge of what the 

10 



146 



THE THEORY OF TIME-VALUE 



[CH. 17 



Several 
reasons why 
this is not 
easily rec- 
ognized 



The scarcity 
of present 
gratifica- 
tions 



exchange of direct and indirect goods means; yet abstractly 
stated, the thought seems at first difficult. In valuing any 
durable good, the theory of time-value is implied. Every 
time a machine, a house, a book, a field, is bought, the distinc- 
tion between direct and indirect goods is acted upon, for a 
choice has been made between present enjoyment and future 
provision. Anything that endures is an indirect good and 
implies in its valuation a premium rate on present goods. 

The real nature of the exchange in time-valuation is made 
unclear by the uncertainty of life, leading men to work on to 
provide against possibility of mishaps; for the most part 
the world's treasures never afford to their temporary owners 
the gratification that they typify, or could give. The 
nature of this exchange is made unclear also by habit, 
under the influence of which the exchange in so many cases 
is not carefully thought out, is not the result of a close 
comparison of the utilities of goods in present and future 
moments. The real nature of this exchange is made unclear 
by the indirect, or induced, gratification derived from wealth. 
Wealth gives to its owner power, prestige, the esteem 
of his fellows, and pride in evidences of success and grow- 
ing prosperity. Its very possession creates a new need 
and imparts to it another utility, that of insuring against 
the misery of a declining fortune one who has enjoyed 
wealth and power. Men make the greatest efforts up to the 
last moment of life to retain wealth that they will enjoy only 
in this subtle and indirect way. Thus every motive that 
leads men to postpone present enjoyment makes them bidders 
for indirect agents and for future goods, and helps to 
determine the market rate of premium on the present, and 
of discount on the future. 

8. There being a limited v umber of indirect agents, 
their limited powers in a given period limit the supply of 
prese7it goods. The principle is familiar that value is always 
connected with relative scarcity. Now the desire for the 
present goods is indefinitely large. If the right kind and 



§11] ADJUSTMENT OF THE EATE OF TIME-DISCOUNT 147 

quality could be had at will, an enormously greater amount 
of present goods would be used. But the present goods are 
dependent on indirect agents. The psychic income of a 
civilized community is dependent on a favorable and ex- 
tremely refined environment: houses, libraries, theaters, the 
agencies of travel, as well as the sources supplying the more 
material needs. These indirect agents, even in the richest 
community, are limited in variety, in quality, and in 
number. 

But if indirect agents could produce an indefinitely large The total 
product at any given moment, the supply of present goods usesi^^ 
could be indefinitely increased. The supply of utilities, vastly 
therefore, is limited by " diminishing returns " in the use ^^ "" 
of agents, making their maximum yield depend upon 
the lapse of time. The uses any given material can yield 
in a limited period have an absolute limit: an acre of land 
with the most perfect cultivation cannot feed the world; 
but remove the limit of time, Avait an eternity, and the acre 
would yield an infinite crop. The economic return of a given 
agent in a given period is reached much sooner than the 
technical return. If agents are forced to yield more bounti- 
fully, it is at the sacrifice of utilities in other agents, 
and a point of maximum net yield is found in any given 
period. Here also the lapse of time is the condition of the 
increase of the net utilities derivable from limited agents. 

4. The rate of capitalization of income and the rate of The choice 
contract interest on money capital tend to unite into a single "nvestorof 
market rate. A person wishing to exchange present goods money 
or income for future goods may buy an income-bearer at its 
capitalized value, or he may create a new rent-bearer. Hav- 
ing saved a sum of money, either he may purchase a factory 
known to be profitable; or he may hire the services of men 
and unite them with materials and machinery to create a 
new industry or a new form of income-bearer; or he may 
loan his money to others to make either kind of purchase. 
In any one of the three cases it is evident that capitalization 



148 



THE THEORY OF TIME-VALUE 



[CH. 17 



The choice 
open to the 
borrower of 
wealth 



(that is, the discounting of future rents in goods) is the 
primary and important fact making possible the emergence 
of a surplus, or net yield, over and above the value of the 
capital. The expected uses contained not only in whole 
industrial establishments, but in the particular materials 
and agents united to form new agents, are purchased 
at their capitalized value; that is, the future uses have 
been discounted and have entered into the price of the 
goods as less than they will be when realized as actual rents. 
This is the crucial point in the theory either of contract 
interest or of time value ; for to explain the rate of interest 
as due to the process of "producing" capital agents out 
of other materials, is to beg the question involved. The sur- 
plus yielded by capital above its cost is but the realization 
of a net income made possible by the discounting of future 
rents. 

A person wishing to make an exchange of the opposite kind 
to that described may sell his wealth for money ; he may ex- 
change for present enjoyable goods his income at its capital- 
ized value ; or he may use up what he has, let it depreciate, 
fail to make repairs, convert it to various consumption pur- 
poses, and thus invade his earning power. When the interest 
rate is five per cent., the sacrifice of any unit of regular in- 
come permits the spending of twenty times that amount for 
present enjoyment. The advantages of these various methods 
tend to equilibrium. If the owners of developed productive 
agents hold them at too high a capitalized value, investors 
will apply their efforts and savings to duplicating these forms 
of wealth. If, in turn, any of the minor factors, as materials 
or uses of goods, are overvalued (overcapitalized) it will 
appear ultimately in a check in the demand for them at these 
prices, and in a reduction in the demand for money loans. 
As it is possible for any investor and for any borrower to 
choose among these investments and loans, there is practically 
but one rate, the rate which expresses the general ratio of ex- 
change between present and future income. Owners and in- 



UI] ADJUSTMENT OP THE RATE OF TIME-DISCOUNT 149 

vestors take the line of least resistance, get the most they can 
for their money, and choose whatever form is most advan- 
tageous. The interrelations between the various interest 
rates are therefore close and constant. The market rate of 
interest thus extends over all forms of wealth and pervades 
every phase of business. The value of every durable agent is 
fixed with reference to a prevailing interest rate, through the 
discounting to their present worth of all the incomes it is be- 
lieved to contain. 

5. Wliere goods are sold at forced sale or sacrifice, it is a sacrifice 
equivalent to a contract loan at a high rate of interest. Mar- saiem- 

. volves a 

ket values being dependent upon market conditions, the offer high rate 
of goods at a given moment may not find the usual or normal °* '^terest 
number of buyers or the usual demand. Just such conditions 
are most likely to exist at the times when business men feel 
an unusual need of money. Two courses are open to them in 
this emergency, either to borrow the money at a very high 
rate of interest, holding the goods for better prices, or to sell 
the goods under the unfavorable conditions. The end of both 
courses is the same — to get ready money; and the methods are 
not essentially unlike — the exchange of greater future values 
for present values. The sacrifice sale thus reveals the mer- 
chant's high estimate of the interest rate. The purchaser of 
some kinds of property in times of depression is securing 
them at a lower capitalization than they will later have. The 
rise in value may be foreseen as well by seller as by buyer, but 
the low capitalization reflects the high interest rate tempo- 
rarily obtaining. A. T. Stewart is said to have laid the 
foundation of his fortune when, being out of debt himself, 
he bought up the bankrupt stocks of his competitors in a 
great financial panic. The high contract interest at such 
times is but the reflection of the high premium on present 
purchasing power. Here then is another mode in which the 
prevailing rate of interest on money loans is kept in close 
harmony with the rate of time valuation. 

6. The rate of contract interest on safe long-time loans 



150 THE THEORY OF TIME-VALUE [CH. 17 

interreia- registers pretty nearly the prevailing rate of time-discount 
tionofthe ^^^ fj^^ Community. There are of course different capital 

money in- ^ _ ' 

terestrate markets, and the estimates put upon next year's income as 
dif °unt™^" compared with this year's is very different in Montana, New 
York, and London. Because of the friction in the transfer 
of investments from one locality to another, these differences 
may persist indefinitely ; but within each capital market 
the interest on any particular loan must, for reasons readily 
seen, tend to conform pretty closely to the prevailing rate. 
Various groups of men living in the same community have, 
however, varying estimates of time-value. The increase of 
safe long-time bonds issued by strong corporations and by 
wealthy nations as, for example, the New York Central 
Railroad, and the government of Great Britain, gives a 
large number of choice investments where the element of 
risk is almost entirely absent. Various agencies have devel- 
oped for making the loans, that is, for bringing the borrower 
and lender together with the minimum of trouble and ex- 
pense. Other efficient, but somewhat more costly, agencies 
for bringing together the owners of loanable capital and men 
wishing to use capital are savings-banks, building and loan 
associations, insurance companies issuing endowment poli- 
cies, and mortgage-investment companies of many kinds. 
While on the one side of the bidding are thousands of lenders 
offering to exchange ready money for assured incomes, on 
the other are thousand of borrowers offering to exchange the 
promise of assured incomes for ready money. If either 
of these classes got far out of touch with the prevailing rate 
of capitalization, to which all the valuations are adjusted, 
that class would lose greatly. 
Relations 7. All the net usufructs actually yielded hy wealth are 

concept of ''^''^^/ economic time-discount is never a realized income; 
rent, inter- it is merely a calculation form, or anticipation of the differ- 
tfme-vaiue ^"'^^ heticcen present and future gratifications. There has 
been much discussion as to what should be the relations 
in thought between rent and interest. Space permits here 



UI] ADJUSTMENT OF THE RATE OF TIME-DISCOUNT 151 

only an indication of the view on this question involved in 
the foregoing treatment. Rent, as the term is here applied, 
includes all the net productivity attributable to the oM^ner- 
ship and use of wealth, whether the yield be in economic 
form (in an increment of value) or in contractual form. 
Even contract money-interest must be looked upon as a 
species of the genus contract rent, the peculiarity in the 
money loan being merely that the thing which it is agreed 
to return is a certain number of units of the standard money. 

The term ' ' interest, ' ' first applied in the Middle Ages to a 
payment for the use of a money loan, came to be used more 
broadly by the earlier economists as the income attributable 
to those goods which generally were bought and sold in terms 
of money. In other words, interest was supposed (though 
erroneously) to be uniquely connected with the particular 
production instruments to which the term capital was nar- 
rowly and mistakenly confined. Still more to add to the 
confusion, the term interest was about this same time identi- 
fied with the broad problem of time-value. The terminology 
has remained ever since in this stage of arrested development. 
Our suggestion is to retain the word interest in its original 
meaning, still almost universal in business circles, of a 
contractual payment on money loans, applying the term 
time-value (for lack of a better word) to the subtler eco- 
nomic problem. 

Time-value is here understood to be that all-pervading Rent and 
difference in the values of uses and gratifications of wealth areessen- 
at different points of time. A comparison of the value of tiaiiy differ- 
momently appearing uses of wealth is the rent problem, of the value 
Here are, therefore, very different aspects of the value problem 
problem. The rent conception is earlier grasped by men, 
is nearer in point of logic; the concept of time-value has 
only recently been clearly recognized. If men lived only in 
the moment, thoy would be concerned only with rent; living 
in the future also, they are constantly regulating their acts 
with reference to time-value. 



CHAPTER 18 

RELATIVELY FIXED AND RELATIVELY 
INCREASABLE FORMS OF WEALTH 

§ I. HOW VARIOUS FORMS OF WEALTH MAY BE INCREASED 

The older 1. Men seek to increase income hy increasing u-ealth. 

and the ^len may strive to increase their rents without expressing 

modem way *' , _ r- o 

of viewing the rent-bearer in terms of capital. Peasant owners and 
wealth small proprietors, toiling fondly on their little estates, seek- 
ing steadily a larger crop, a larger income, accomplish 
wonders in bringing waste land to a high state of cultivation. 
Working on the soil that is at once their livelihood and their 
home, they do not consciously reckon the value of the labor 
they are putting upon it. No money can buy that which 
to them is beyond price. But, in our money economy, efforts 
are largely directed toward the increase of the capital sum. 
Investment takes the form of putting in a sum of money 
in the hope of getting an income bearing a certain relation 
to it. The first thought is of the value of the wealth invested, 
which has been carefully measured and expressed in dollars 
and cents. Wealth looked at in the older way was valued for 
what it did immediately for its owner, for its concrete fruits ; 
looked at in the modern way, it is valued as a marketable 
income-bearer readily convertible into a multitude of other 
forms. Thus investments come to be thought of in terms of 
general purchasing power, from which it is expected to 
realize an income of a given percentage. 
Free goods 2. There are some classes of goods that can he increased 
elppii"^*^ w;i^/iowi any noticeable increase in diffictdty. The extremest 

152 



61] VARIOUS MODES OF INCREASE 153 

examples are undiminished goods such as air, sea-water, 
the water of large rivers. These are free goods because, 
however much is used, the supply is immediately renewed. 
But they are undiminished only in a relative sense and in 
reference to present need. The water in the Western rivers 
long flowed on, undiminished by the uses made of it. But 
progressing civilization required more water for cities, for 
mining, and for irrigation, and now states and corporations 
are going to law over these formerly undiminished free 
goods. Some kinds of goods are produced from such very 
common materials that it might seem possible, by the sub- 
stitution of agents, to produce an unlimited supply. How Beginning 
can bricks be limited in number, being made as they are °^ scarcity 

, *' of common 

from one of the commonest materials on the earth 's surface 1 materials 
But the largest clay banks are limited in size; a large 
proportion of the places where bricks are needed are not 
near a supply of clay of good quality; and after a brick- 
yard has been used for a time there is increasing difficulty 
in getting out the material. While, therefore, bricks are 
scarce and hard to get from the outset in some places, the 
scarcity grows more marked in many places at first well 
supplied. If materials are scarce in any degree, their con- 
tinued use for one purpose increases their scarcity in all 
other uses. Economic goods are goods having value; value 
implies scarcity, and an increasing demand means inevitably 
a higher value at some point. This is true of clay, stone, 
water, and the commonest kinds of labor. 

It has long been customary for economists to talk of eco- no scarce 
nomic goods that could be increased indefinitely (meaning f^g^iy* 
infinitely or, in any event, without any limit ever appreciable increased 
to man) without any increase in the cost or scarcity. This 
class of goods was considered to be very large. There is no 
such class of economic goods; it is evidently impossible that 
there should be. If they are already " scarce," increasing 
demand must make them scarcer. There are, however, some 
goods that practically can be increased with so little diffi- 



154 



RELATIVELY FIXED FORMS OF CAPITAL 



[CH. 18 



The prod- 
ucts of land 
are in- 
creased at a 
given time 
and place at 
increasing 
cost 



Agents 
most nearly 
fixed in 
amount are 
somewhat 
increasable 



culty that their limitation is not of great social importance. 
Progress, population, prosperity, are not primarily condi- 
tioned on their amount ; limitation will be felt far earlier 
elsewhere. They are at one end of the scale; they are the 
relatively increasable goods. 

3. There is a large class of goods whose increase is seen 
to he gained with increasing difficulty. This is seen most 
clearly in the diminishing returns from land. In the at- 
tempt to get some food-products in greater quantity from a 
given area at a given time, increasing difficulty is met with 
at once. This attempt continued for a series of years results 
in historical diminishing returns, as was strikingly illus- 
trated in English experience during the Napoleonic wars, 
when wheat rose in value because of the greater difficulty 
of producing the larger supply needed. Some replenishing 
agents will restore themselves if given time ; the forest will 
grow up if left untouched by man ; the field will recover its 
fertile quality if allowed to lie fallow. But this self-replen- 
ishing of agents is a slow process, and time is costly. Man 
therefore tries in other ways to force more uses out of goods, 
until checked by the increasing difficulty The goods subject 
to " the law of increasing cost," as it was called formerly, 
were considered to be a peculiar class comprising only a 
small portion of wealth. But it can now be seen that the 
law may apply ultimately, though in differing degrees, to 
every kind of economic goods. Indeed, the principle just 
discussed is no more than one phase of the law of economic 
diminishing returns, which has a universal application to the 
realm of values. 

4. There is a class of goods, natural agents and stores of 
materials, which appears to he relatively fixed in quantity 
or which is increasable only with much difficidty. The first 
part of this proposition expresses mildly the thought that 
long obtained among economists : it was said that the supply 
of certain things was absolutely fixed, the chief of these 
being land used for agriculture. The idea as held by 



511] SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 155 

Malthiis and Ricardo was modified by John Stuart Mill in 
somewhat inconsistent ways. Land, it was said, is a thing 
which " man cannot make," therefore its supply is fixed. 
The second part of the opening proposition expresses the 
view here held : the supply of no important class of goods 
is absolutely fixed, in any reasonable sense. Most, if not all, 
belong to the class that is increasable, although it may be 
with much difficulty. Even when the exact thing cannot 
be duplicated, as a bust by an ancient sculptor or an auto- 
graph of a dead author, many substitutes serving the same 
or closely related wants, affect and limit the demand, and 
thus increase the supply. Men cannot, it is true, increase 
the stores of copper in the earth, but they devise new 
processes to extract it from ores before worthless, and invent 
methods of procuring aluminium, which yields some of the 
same utilities as copper. Even the supply of land, as is 
shown elsewhere, is constantly changing. Thus all kinds 
of wealth can be increased in some degree; many kinds in 
the course of time are very greatly increased with little or no 
direct effort, but the supply of all alike can be secured in 
larger amount at any given moment only at the cost of 
increasing difficulty. 



§ II. SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 

1. Not the fixity of the physical amount of agents, hut the physical 
econotnic supply is significant. There is danger of confu- ^^o"°t/s- 

' ' -^ . economic 

sion between these two ideas. The statement that "land" supply 
cannot be created and that therefore "the supply is fixed" 
involves a fallacy. The word supply means the amount that 
is available at the moment or during the period spoken of. 
The land in Greenland is not, and probably never can be, a 
part of the supply of land in England. The land in Amer- 
ica for centuries was not, but now has become, for some 
Ijurposes, a part of the supply in the same market as the 
land of England. The question of importance in economic 



156 



RELATIVELY FIXED FORMS OF CAPITAL 



[CH. 18 



Discovery 
enlarges the 
supply of 
natural 
resources 



The effec- 
tive supply 
grows by 
invention 



discussion is not Avhether the physical material can be 
brought into existence, but whether the economic "supply" 
can be increased. The existence of coal-mines in Venus 
or Mars is of no economic importance to us, but coal-mines 
on the earth, yet undiscovered, present a potential supply 
that at any moment may be realized. 

2. Discovery of new lands and of new natural deposits 
continually enlarges the economic supply of the agents most 
nearly fixed in physical amount. This proposition states a 
historical fact. Any explanation of the economic occur- 
rences of the last five centuries or of the immediate future, 
that ignores this fact of the increasing supply of many 
kinds of land and natural resources in the markets of the 
civilized world, must lead to false conclusions. The rate of 
this movement has been more rapid in the past century 
than theretofore, and perhaps more rapid than it will be 
henceforward; but that this development will continue in 
large measure and for a long period, is not open to question. 
Undeveloped areas will be opened to the world, and new 
geologic realms will be explored. Yet the notion criticized 
above is found in all the older text-books. The idea arose 
in England in the first quarter of the nineteenth century 
when land and food were rapidly rising in price, and it has 
vitiated a large part of both the economic theory and the 
practical conclusions on this subject. 

3. Invention, including new modes of transportation and 
new processes, increases the economic supply of most scarce 
goods and provides substitutes for the others. Some inven- 
tions increase economic supply by making available the 
uses in goods that were before unavailable. Subsoil plough- 
ing annexes to agricultural land new layers of soil that are 
just as important as new acres added to the surface. If 
land could be used three times as deep, it would be as good 
for many purposes as if it were of three times the extent. 
New trade routes and new means of transportation add to 
the supplies available in the older countries as effectively 
as if their areas were increased. The building of railroads 



§11] SOCIAL SIGNIFICANCE OF THESE DIFFERENCES 157 

in western America had an effect on English rents identical 
in nature with that which would have been produced had an 
equal area of somewhat less fertile land touching England, 
risen out of the ocean. Every country in Europe has re- 
peatedly felt the shock of these great economic changes 
which have compelled the recapitalization on a lower plane, 
of nearly all kinds of their landed wealth. Where the same 
agents have not been multiplied, substitutes have been found 
that are just as effective in meeting the economic need. It 
is the result, the gratification, that man seeks : any particular 
good is but the means to an end. 

4. Increasing wealth and new labor make possible the Production 
increase of the agents that appear most nearly fixed in physical 
supply. When the need arises men turn to new enterprises, change 
The reclaiming of land in Holland is a striking but far 
from isolated example. Among the larger undertakings 
of this kind are the draining of the Haarlem Lake in 
1840-58, by which 40,000 acres of rich land were made avail- 
able, and the draining of the Zuyder Zee, which is adding 
1,300,000 acres. Though there have been many minor un- 
dertakings of the kind, the area reclaimed is relatively small 
compared with the whole area of the land in the world used 
for agricultural purposes. There are still great areas of fens, 
swamps, and marshlands, such as those on the Jersey coast 
in this country, which with moderate effort could be re- 
claimed. While the possibility must be recognized, the in- 
crease of the area of available agricultural land by means 
of such physical changes is relatively small. 

The work of the pioneer, as a producer of a supply of And by the 
land, is, however, of the greatest importance. The pioneer ^"neers 
annexes new areas to the economic world and to the market 
in which he has lived. This is recognized of late by writers 
that perhaps do not fully mark its significance to economic 
theory. The work of the explorer and prospector is that of 
a producer of mineral resources, and daily market quota- 
tions reflect the changes in " the supply " of these natural 
stores. 



158 



RELATIVELY FIXED FORMS OF CAPITAL 



[CH. 18 



Successive 
utilization 
of various 
grades of 
agents 



Goods 

ranged on a 
scale of in- 
creasable- 
ness 



5. Limitation of the supply appears first in the better 
qualities, and efforts lo increase wealth are then directed to 
making available the poorer grades. Great quantities of the 
poorer grades of wealth, even of those things that are rel- 
atively fixed in supply, lie unused. Great areas on the edge 
of civilization still await the pioneer, the prospector, and the 
miner. Here is a source of wealth and a field for enterprise. 
The growth of society may cause some of the poorer agents 
in time to become the best. When men crossed the ocean 
to settle on Manhattan Island, it was a wilderness ; but the 
growth of commerce has caused the land in New York city 
to become more valuable than that in London. Changes 
are still in progress, for of late the smaller ports to the south 
have increased their trade at a more rapid pace than New 
York has. 

The difference in increasableness of the various forms of 
wealth is of importance in considering various social ques- 
tions such as the effects of an increase of population, and the 
kinds of taxation most equitable and most favorable to the 
progress of society. Account must be taken of the fact that 
the number of bricks can be increased more easily than the 
amount of land; but there must not be overlooked the pos- 
sibility of increase in any of these forms of wealth, nor 
the limits to the increase of any one of them. When one 
wishes to save or increase wealth, he turns to these great un- 
appropriated fields, unused things or things imperfectly 
used, and tries to convert them into effective agents. The dif- 
ferent forms of wealth may be ranged on a scale according to 
the ease with which they can be increased by effort. They 
may therefore be classed as relatively fixed and relatively in- 
creasable. Some natural resources belong at one end, and 
some at the other end of this scale. No hard and fast line 
divides the different kinds of goods, but the difference in 
degree of increasableness is a fact of great social import- 
ance, affecting the direction in which industry can and must 
progress. 



CHAPTER 19 

SAVING AND PRODUCTION AS AFFECTED BY 
THE RATE OF INTEREST 

§ I. SAVING AS AFFECTED BY THE INTEREST RATE 

1. In the case of consumption goods, present marginal The interest 
uses are often less than future uses as judged at the present, r^^e traces 

, ' . . ' J u 1/ the division 

^The proposition that future goods sometimes have a greater between 
instead of a less value than present goods may at first seem Present and 
to deny the general fact of economic interest, which is a gratiflca- 
premium on present over future goods. The contradiction **°°® 
is only apparent, however, and the proposition is merely a 
proper interpretation of the theory of interest. The asser- 
tion that present goods have greater value than future goods, 
as we have accepted it, requires two explanations. First, 
it means that this difference exists when the two are judged 
and compared at the present moment. The future use when 
it matures may be much greater than the present use; in- 
deed, the very existence of interest depends upon this surplus 
of value arising by the lapse of time in the future use. 
Secondly, the proposition does not mean that every concrete 
good, or every use of the goods, is worth more in the present 
than in the future; it means merely that the demand for 
present goods preponderates so that a market rate in favor 
of present possession prevails. In a great many cases a par- 
ticular good may have a greater value to be kept for the 
future than to be used at present, in which case it is kept, 
or it is exchanged for something else having a higher value 
in the present. But this preference of the future over the 

159 



160 



SAVING AND THE INTEREST RATE 



[CH. 19 



The less 
necessary 
goods are 
the ones 
saved 



present cannot pass a moderate limit without condemning 
the person to present misery, and at length to death. On the 
other hand the excessive preference of present over future 
would lead to the using up and wearing out of wealth, to the 
present enjoyment of every possible resource, on the penalty 
of future misery. Evidently somewhere between these two 
extremes there must be, in each economy, a ratio of exchange 
between present and future, which in fact is the interest 
rate. This rate applied to utilities traces through each good 
a line analagous to the isothermal line on the map, marking 
off a zone of utilities for the present and other zones for each 
period of the future. There is thus a close relation between 
saving and the rate of time-discount. 

Let us illustrate by the case of fruit stored in the cellar 
for future use. In the fall after the appetite for apples 
has been gratified up to a certain point, there still remains 
a large stock which affords less gratification if consumed at 
once than if kept for a time. Thus wood, food, and clothing 
are stored in the summer for the winter's need. Even the 
animals act on this principle. Squirrels, bees, and ants store 
up in the season of superfluity for the season of scarcity. 
The animals recognize with their feeble intelligence or by 
instinct, that a time will come when these consumption goods 



•N 



rsNow 



1 V 



<rf G- od« f» ■ Pf-eM nT U: 



ods 41 ta tor FVesei 
JVar<<. 



Present VALUE Kn* 



*-"-s ■ 



wir.t» aly^cir hint. N 






._! I L j.__j. __j 



!\. 



\ 



I 

I 

I 

I' I — 



— ^ 



\ A Year Heric* 



kbit.* o ' Gooc I Non 



■^.. 






.-^ 



•^^ 



9 



will represent greater importance to their welfare than they 
do at the moment. It results from the nature of wants and 



$ I] SAVING AS AFFECTED BY THE INTEREST RATE 161 

the principle of diminishing utility that in many cases some 
portion of a large supply of present goods must be worth less 
now than at a future time. This part, the marginal, less 
necessary part, will be left for a future time, and it is to this 
part that our opening proposition refers. This is roughly 
illustrated by the diagram. 

Tilings that cannot be kept, perishable goods, do not per- 
mit of this comparison. But if goods that can be kept con- 
tinue to be used after utility has fallen down the scale, their 
high value for the future is cast away. Man lives not alone 
in the present but, in a far greater measure than do any ani- 
mals, he lives in the future also. His economic life and his 
economic judgment comprehend a great number of periods 
at once. With the aid of memory and imagination he fore- 
casts the future, and compares it with the present. The 
diminishing utility of goods, therefore, is modified by this 
fact that a thing has want-gratifying power at different 
periods. Before man uses goods for an inferior purpose he 
will ask whether, if they are kept for the future, they will 
not gratify a greater want. 

2. The gradual rise of a consumption good with the lapse The less 
of time from the lower to the higher degree of qratification ^^^^^^ 

11 u a I J I i^gg jn value 

is the rent it yields. The difference in value of present and with the 
future rents is expressed by the discount of the future use ^P^eoftime 
when it is capitalized at any earlier moment, and emerges 
in the rise in value as the thing approaches to the time when 
it can render the later use. Next year the unit whose use is 
deferred will afford as much gratification as the earlier 
units do now, and more than if used at the present moment. 
The importance of any present utility is compared with its 
importance a year later, plus interest at a rate which ex- 
presses the limit to which future uses are discounted. Any- 
thing that makes men feel more the importance of future 
uses causes them to value those uses more. But the pressure 
of present want is such that a present use of a lower order 

competes with a future use of a higher order. Only goods of 
11 



162 



SAVING AND THE INTEREST RATE 



ICH. 19 



Interest Is 
the equal- 
izer of time 
values 



Saving in- 
creases and 
improves 
economic 
agents 



a lower order, nearer the margin, are reserved for the future. 
But just as the possibility of using a thing for several dif- 
ferent purposes at present causes it to be valued more highly 
than if it had but one use, so the possibility of reserving to 
the future a portion of a stock imparts to every unit a higher 
marginal utility. 

3. The saving of present goods for future use is encour- 
aged hy the motive of gaining the interest. Many consump- 
tion goods grow into higher uses in the hands of the owner, 
whether he uses them for himself or not. Ice may be stored 
in midwinter when it is all but a free good and a little labor 
serves to fill the ice-house. Kept until the summer months, 
the ice rises in value as the desire for it grows. Likewise 
the higher price secured by the owner of a thing kept for 
sale to others, reflects the change in utility, and affords prac- 
tically a rent which is the motive for investing capital in 
that business. Any saver or abstainer puts aside present 
wants only when the future good, with the addition of time- 
value or of money interest, appears as large as the present 
good. Interest is therefore the equalizer of the value of 
things in different periods. Put into the scale of judgment 
when present and future are compared, it helps to balance 
the disparity in the gratifications given by economic goods 
in different periods of time. 

4. The postponement of present wants results in better- 
ing the economic environment for the future. Economic 
environment means simply the economic conditions in which 
men live, the stock of wealth, the supply of useful things 
with which they are surrounded. This betterment may be 
only temporary, only for the immediate future. Like the 
busy bee or the prudent ant, one may in summer store the 
cellar with consumption goods to be consumed the following 
winter. But often there is a more lasting way of improving 
the economic environment by converting savings into du- 
rable indirect agents. The accumulation of wealth that will 
yield its fruits only after years of growth is the record, so 



§11] CONDITIONS FAVORABLE TO SAVING 163 

to speak, of the successful competition of forethought with 
present desires. It means that the two periods have pre- 
sented their respective claims and that men have decided 
in favor of the future. Saving thus lifts society from pov- 
erty to wealth by the progressive enlargement of the sources 
of future utilities. 

5. Ahstinence is the faculty of mind that enables present Thekindsof 
wants to he sudordinated to future wants. Abstinence may ^^^^i^ence 
be considered as a quality, or faculty, of the mind, or as an 
act resulting from that quality. There is little danger of 
confusion in this usage, but it is well to note the distinction 
and the fact that the former is the primary meaning. Ab- 
stinence expresses an act of the will, a choice made by man. 
It is the guardian of the future, so to speak, against the 
greediness of the present. For convenience we may speak 
of conservative abstinence as that which keeps men from 
using up or invading their present stock of resources, and of 
cumulative abstinence as that which impels them to add to 
that stock. There is no sharp dividing line, no abrupt break, 
between these two, yet on the whole they differ. There is a 
quality of mind very like the inertia or momentum of phy- 
sical matter. The inertia of mind makes men resist stub- 
bornly the reduction of wealth and of inherited social posi- 
tion ; but it requires a more positive quality of mind to add to 
wealth at the cost of present sacrifice. Abstinence is em- 
bodied in individuals, never elsewhere, and is found in most 
varying degrees of strength. Upon it depends the growth 
and betterment of man's environment. 



§ II. CONDITIONS FAVORABLE TO SAVING 

1. Political security and domestic order are essential to political in- 
the development of saving. As saving results from a com- ^fg"^"^ 
parison of the future with the present, any lack of certainty saving 
regarding the future decreases the appeal it makes. Men 
employ roughly the theory of probabilities in this matter, 



164 



SAVING AND THE INTEREST RATE 



[CH. 19 



Influence of 
private 
property on 
saving 



and count a utility only half as much when there is 
but one chance in two of enjoying it. In countries where 
there are constant revolutions and border wars, as in Africa 
and South America, and in lands where brigandage is com- 
mon, as in Italy, Macedonia, and Bulgaria, the motive for 
saving is cut in two. Oppressive and irregular taxation kills 
the motives of providence, and decreases the appeal made by 
the future. While the miserable subjects of the state live 
from hand to mouth, the very sources of the public revenue 
disappear. Improvidence grows upon such a people into a 
prevailing national custom; ambition is wanting; industry 
is the sport of chance; economic order and economic pros- 
perity are impossible. 

2. Social institutions that give a motive to the individual 
are essential to saving. Among these institutions the most 
important are the family and, closely connected with it, the 
institution of private property which, in its ideal manifesta- 
tion, places the responsibility for economic welfare on the 
individual or the family. Through it the state says to men : 
* ' Save if you will ; the wealth and its fruits shall be yours. 
But if you spend and consume all you can, you alone will 
suffer the consequences." It is true that the institution 
of private property never is found in an ideal form. Dis- 
honest public officials weaken and defeat its benefits. Every 
propertyless family marks a failure in its purpose. Private 
property is a favorite object of attack by social reformers, 
but it never can be safely abolished in a civilized state 
until some other incentive is provided, equally effective to 
make men subordinate present desires to future welfare. 
Unless the mass of men can be greatly changed, property 
creates the only motive that can induce saving regularly 
and on a large scale. It diffuses responsibility for present 
consumption. It multiplies the motives for abstinence and 
thus increases the welfare of all economic society. 

3. Opportunity for the investment of small savings fa- 
vors a spirit of abstinence. The institution of small prop- 



5n] CONDITIONS FAVORABLE TO SAVINQ 165 

erty, peasant proprietorship, worked powerfully in this safe and 

direction in many parts of Europe, and the same effects have P^yi^g in- 
vestments 
resulted in America from the wide diffusion of property encourage 

in land. If the decline in the number of small independ- saving 
ent farmers has somewhat weakened this influence in 
America, in other ways other agencies are effectively per- 
forming the same functions. Savings-banks, penny banks, 
building and loan associations, penny-provident funds, and 
other convenient means of investing small sums, encourage 
men to reduce their tobacco bills, their candy bills, their 
saloon bills, and to lay aside for the winter's coal, for the 
children's education, for houses, for business investments, or 
for old age. Probably no one thing has given a greater stim- 
ulus to saving than has the development of insurance and the 
endowment policies in connection with it. While the great 
modern corporations have destroyed many of the small busi- 
ness enterprises into which so much of the saving of the past 
was put, at the same time the increase of negotiable paper, 
of loans, and of stock in joint-stock companies, has opened up 
other large fields for investors. 

4. Valuations in the rate of discount of the future react changing 
upon the spirit of saving in various ways. This very general In^^J^yo**^ 
proposition requires more detailed discussion. In general, to saving 
a high rate of interest gives a large motive to save, for as the 
discount on the future is large, so is the reward for waiting. 
But this favoring motive may be offset by other unfavorable 
conditions, and is, in fact, wherever the high rate continues. 
In countries backward economically, where war, brigand- 
age, and political oppression prevail, the rate of interest 
is frequently ten and twelve per cent, on the best secured 
loans. A high interest rate does not of itself insure a high 
degree of cumulative abstinence ; it is only one of several 
factors. But in a new and favored country like America, 
a high rate of interest is a strong stimulus to saving. Again, 
interest may fall while saving continues at the same or a 
greater pace. Ordinarily a fall from six per cent, to five, 



166 



SAVING AND THE INTEREST RATE 



[t'H. 19 



giving men a smaller motive for abstinence, would be ex- 
pected to cause less saving, yet this is not always the case. 
Custom and example help to fix a habit of saving in 
individuals and cause them to continue saving at a lower 
rate of interest. With the growth of wealth, the prevailing 
ideas as to the amount needed for a competence change, im- 
pelling to greater saving. The tendency, however, of a fall 
in the rate of interest is to weaken, and that of a rise of 
the rate, other things being equal, is to strengthen the motive 
to save. But the influence of the interest rate on saving is 
relative to the character of men. 

§ III. INFLUENCE OF THE INTEREST RATE ON METHODS OF 

PRODUCTION 



Saving per- 
mits im- 
provement 
of agents 



Saving of 
consump- 
tion goods 
for ex- 
change 



1. The individual saver is enahled to improve the agents 
that he uses. The simplest case is presented when means of 
enjoyment are improved and made more durable. If Crusoe 
on his island spends less time and fewer resources on grat- 
ifying his immediate wants, he may improve the quality of 
his clothing and the convenience of his house and furniture. 
By thus putting his consumption goods into durable instead 
of temporary forms, he will increase eventually the sum of 
utilities enjoyed. Again, abstinence permits the tools of the 
laborer to be made more convenient. If the farmer spends 
less time in the garden and he and his family live on plainer 
food, while he makes a plow, mends a rake, and builds a 
shed, he will be enabled thereafter to gather a greater crop 
with less effort. 

2. Consumption goods, when saved, may he exchanged 
for services, and these may he used to create durahle agents. 
Various ways are open to one wishing to increase his stock 
of durable agents. He may forego seeking immediate en- 
joyments while he makes durable agents himself. Or he 
may make and save a stock of consumption goods, a surplus 
supply for the future, and exchange it for durable agents. 



illl] 



PRODUCTION AND THE INTEREST RATE 



167 



Finally, one who has accumulated consumption goods can 
always exchange them for the services of those seeking 
subsistence and enjoyment; and thus in control of a labor 
force, he can direct it toward the production of new forms 
of productive agents. 

3. In modern industry, saving frequently takes the form 
of money, which is then loaned to productive borrowers. 
This is the typical form of saving in modern industry. As 
it is more and more the case thai income takes first the form 
of money, saving most conveniently takes the money form. 
The clerk on a salary of $60 a month spends $50 and saves 
$10 which he lends to a neighbor or deposits in a savings- 
bank. The borrower is thus empowered to increase his stock 
of productive agents in the measure that the lender has 
limited his consumption. The complexity of the process by 
which money saving becomes embodied through a money loan 
in new productive agents should not blind to its real nature. 
The money is saved as a means to the exchange of present 
goods for future income. Money even in our day is occasion- 
ally stored away for future use under hearthstones or in 
old stockings and hollow trees, but this is a primitive and 
wasteful method, involving the loss of all the additional 
rents that its exchange and investment would yield. 

If the money saved by the thrifty saver is loaned to a 
thriftless borrower, wealth is not increased, but merely 
changes hands. The prodigal mortgaging his wealth, spend- 
ing the money, and living beyond his income, absorbs the 
savings of the other. One saves and adds to wealth, the other 
consumes it. There is no net increase of goods, but two 
individuals have shifted positions; each has gotten his re- 
ward of growing affluence or penury. 

The " normal " end, however, of savings and loans is pro- 
ductive. The borrower, in getting control of purchasing 
power, aims to put a new machine where it will be useful, 
to remove obstacles, and to make economic agents more 
effective. Along the border-land of industry the active and 



Money 
savings ara 
converted 
into other 
wealth 



168 



SAVING AND THE INTEREST RATE 



[CH. 19 



Lower in- 
terest 
means 
higher cap- 
italization 



And more 
complex in- 
dustrial 
processes 



It encour- 
ages the in- 
crease of 
fixed 

charges to 
reduce cost 
of operation 



alert borrower seeks out opportunities to make new agents 
earn a rental, and having found the opening, turns to the 
money market for the means to profit by it. 

4, A fall in the rate of interest noi'mally accompanies 
an increase in the mass, efficiency, and valuation of durable 
economic agents. A lower rate of interest means a higher 
capitalization of all incomes. It is not that either can be 
called the cause of the other; rather both are aspects of the 
same thing, the interest rate merely registering the change 
in capitalization. If the rate of interest has been five per 
cent., an income of $100 has been capitalized at $2000, 
When the rate falls to four per cent, the income is recapital- 
ized at $2500. All along the line of investment there is 
an increase in the value of the durable economic agents. 

Another phase of the change is the greater complexity of 
the processes of industry. Production becomes technically 
more complex when interest falls. Rental, product, and pres- 
ent goods, bear a smaller ratio to the value of capital, and 
therefore it becomes advantageous to apply newly formed 
capital to uses which before did not justify the investment. 
Where formerly the utility of a second tool did not justify 
its making, now it can be made to earn the smaller rental 
needed to balance its capital value. One form, therefore, 
which the change takes, is a multiplication of the tools al- 
ready used. Things are placed wherever most convenient. 
Another form this change takes is the putting of new links 
into the chain of technical production. Cost of operation 
constantly is compared with fixed charges, the interest with 
the capital investment. Expensive improvements on rail- 
roads, the straightening of curves, the tunneling of moun- 
tains, the reducing of grades, the replacement of lighter by 
heavier rails, have been made possible by a fall in the rate 
of interest. A fall in the rate of interest disturbs the 
equilibrium that has been arrived at, between the cost of 
operation, the amount paid for wages, coal, etc., and the 
income on permanent investment. If the rate of interest 



§m] PRODUCTION AND THE INTEREST RATE 169 

has been five per cent, and falls to four per cent, many 
permanent improvements before unwise become economical. 
One thousand dollars paid annually in wages then balanced ' 
an interest charge on a capital investment of $20,000; now 
it balances the interest charge on $25,000. It becomes a 
paying thing for the railroad to abandon or throw aside an 
enormous capital represented by the old, less perfect road- 
bed, and build a new one alongside of it. The changes of this 
kind one sees in traveling on the great and progressive rail- 
roads, reflect in part the growth of traffic, but in part also 
a change of the interest rate, making it a net saving to 
increase the capital investment in order to reduce the cost 
of operation per unit of traffic. 

The benefits of saving viewed broadly are not confined Diffused 
to the owner of the wealth saved, but are diffused throughout »^°efltsoi 

' ^ saving 

society, in the degree that they increase and improve the 
industrial environment, and thus raise the efficiency of pro- 
duction. Such a change works the same results as would 
a magical increase in the fertility of the soil, an improvement 
in the richness and accessibility of natural mineral stores, 
or in the quantity and quality of artificial appliances. 



PART II 
THE VALUE OF HUMAN SERVICES 



PART II 
DIVISION A-LABOR AND WAGES 

CHAPTER 20 
LABOR AND CLASSES OP LABORERS 

§ I. RELATION OF LABOR TO WEALTH 

1. Labor is any human effort having an aim or purpose work and 
outside of itself. It is difficult to define satisfactorily the P^^y defined 

"^ and dis- 

terni labor. No definition will quite mark ofl:" all the cases, tinguished 
The efforts put forth by men may be classified according as 
they are pleasant in themselves, and according as they have 
separable useful results. These two factors combine to form 
four groups of actions. 





Effort 


Objective result sought 


Name of action 


1. 


Pleasurable 


Not useful 


Play 


2. 


Pleasurable 


Useful 


Labor 


3. 


Painful 


Useful 


Labor 


4. 


Painful 


Not useful 


No special name 



The fourth combination is not found in rational life, for no 
motive exists to do a painful act for a useless result. Let 
us consider the other three. 

The first group comprises most of the sports, games, and Play 
pastimes found in every land and time. In the mere putting 
forth of the powers of mind and muscle there is a joy felt 
by children and men of all races, and this is heightened by 
companionship, emulation, and even by a spice of danger. 

173 



174 



LABOR AND CLASSES OF LABORERS 



[CH. 20 



Labor as 
pleasure 



Labor as 
sacrifice 



Joy in work 
is the ideal 



Play is not dependent on a useful objective result later to 
be enjoyed, but, like beauty, is its own excuse for being. The 
tired student goes out-of-doors to bat the tennis-ball, making 
no change in the material world, except to wear out his shoes 
and to lose the ball, but finding that hour rich in the joy of 
life. If properly chosen, play strengthens and vivifies both 
soul and body, leaving an afterglow of health and happiness. 
The choice of sports and temperance in their pursuit are 
among the surest tests of wisdom in men and in societies. A 
love of vigorous play no less than the power of sustained 
work, marks the dominant and progressive peoples of the 
earth. 

Acts in the second group give pleasure and at the same 
time leave an objective result. The hunter gets more pleas- 
ure if he returns with well-filled bags of game, but the 
distinction between the sportsman and the "pot-hunter" 
is not hard to find. The one has his joy in the sport, the 
other in the material results of the sport. This kind of 
action presents some puzzling cases, but in general must 
be classed as labor, since labor is to be judged by the ob- 
jective economic results rather than by the pleasure of 
the act itself. 

In a third class are the acts that are painful in themselves, 
that are done unwillingly, but that leave a pleasurable result. 
Unfortunately a large part of the actions of men are of 
this class, which to most minds is the typical labor. 

There is thus labor that is pleasurable in itself and labor 
that is painful though it leads to a desirable result. The 
social ideal clearly is that all human labor should be made 
pleasurable. Social dreamers love to picture a day when 
all shall find for effort a full reward in the mere doing,— the 
reward of the artist, of the scholar, of the saint, in addition 
to the objective result in economic wealth. Probably we 
are slowly nearing this ideal. Not only in the professions 
and in the esthetic arts, but in commerce, in mechanics, and 
in the humblest walks of life are found men free from envy, 



5 1] RELATION OF LABOR TO WEALTH 175 

rejoicing in their daily tasks. Such is the normal feeling 
of the healthy optimist. And yet in every serious occupation 
there are numberless moments and occasions when the spirit 
flags and only hard necessity holds men to their tasks. The 
dilettante does not go far or long or steadily ; the real tasks 
of the world are done by men that labor, now with joy, now 
wearily. 

2. The agents of production compose two great species, Thedi^i**^ 
material goods and human services. Our discussion of con- tio»''i>e- I 

tween men 

sumption goods, rent, and interest has been an analysis of and things 
the nature and uses of material goods. We now come to the 
other great species, human services, which comprise those 
acts of men (one's own or other's) that minister to the grat- 
ification of wants. There are also misdirected efforts, and 
evil deeds which are "disutilities" to all but the doer. 

The distinction between men and things is fundamental in 
modern economic discussion where each man is looked upon 
as free. It is not so clear where slavery exists and the master 
looks in the same way upon the services of his cattle, of his 
chattel slaves, and of his land. Even in the freest society, 
man's services are compared purely as to their utility, with 
the uses of other parts of the material world. It is said that 
the price of mules at the Pennsiylvania mines has been 
affected by immigration, because a man and a mule some- 
times represent interchangeable services. But in the study 
of political economy the distinction between men and other 
material things must never be lost sight of; they are the 
two fundamental classes of economic agents, the one being 
solely a means to an end, the other being an end in itself. 

3. Labor and. material wealth are complementary and Rent and 

indispensable to each other in most of tJieir uses. The dis- ^^p^ 

' ' mutually 

cussion of material wealth and its value apart from the affect each 
subject of labor, of the problem of rent and interest apart °^^^^ 
from that of wages, does not imply that this material wealth 
would have the same value in real life if labor were absent. 
As one field affects the valu^ of another field, and one good. 



176 



LABOR AND CLASSES OF LABORERS 



[CH. 20 



Certain 
shares of 
the product 
are logically 
attributed 
to each 



Labor grati- 
fies directly 
and in- 
directly 



by substitution, the value of another good, so does labor 
affect material wealth. Some material wealth can be used 
apart from labor, but most of it must be used in combina- 
tion with some labor. Rent, therefore, is not determined in 
concrete cases apart from men and their services. It is 
allowable, however, in abstract analysis, to simplify the 
question by leaving out a difficult complication, and thus 
to set forth more clearly the logical bearing and effect of a 
certain factor. 

Each of two kinds of agents used together affects the 
utility of the other, and the value of the product. If neither 
can be credited with the whole value, how is any distribution 
to be made between them? It is not possible to measure 
their technical services in the product, but it usually is 
possible to gage their marginal utility under particular 
conditions. Flour, water, and labor are needed to make 
biscuits; but water being a free agent, does not enter into 
the combination with any marginal utility. A match also 
is almost indispensable to start the fire (and who has not 
seen the time when he would give far more for a match than 
for a bucket of coal), but as things usually are, the match 
is credited with a value of a very small fraction of a cent. 
Again, how is to be measured the economic service of the 
tree and of the labor needed for gathering its fruits ? There 
is here suggested the superficial aspect of what is known as 
the problem of complementary values. Where two or more 
things are indispensable to a product, how much shall be 
credited to each? 

4. Human service has the same general relation to wants 
that material goods have, affording gratification either di- 
rectly or indirectly. It is axiomatic that to be " economic 
goods " human efforts like material goods must afford utili- 
ties whose importance is felt. Many services give pleasure 
directly and are immediately consumed. A tropical poten- 
tate has an attendant to fan him, and another to carry an 
umbrella ; a humble citizen is shaved, doctored, sung to, and 



^ II] VARIETIES OF TALENTS 177 

played for. The gratification in such cases is directly pro- 
duced in personal comfort, in the consciousness of heightened 
beauty, in the feeling of self-esteem. Value is thus created 
and consumed immediately, taking no material form apart 
from the consumer. 

But the results of most human services may be seen to rest, Labor em- 
at least temporarily, in some material form. Effort is put ^^*1^ 
upon a material thing to be used later. The work of the in material 
waiter in spreading and arranging the table is not an immedi- *°™ 
ate service, for it is embodied in material form an hour or 
two before the meal. The service of cook no less than that 
of gardener and butcher, is put into material form before it 
comes to the consumer. The woodman fells, cuts up and 
splits a tree, and piles it at tlie door, putting his labor into a 
utility to be consumed months afterward. The old econo- 
mists used to class labor as productive and unproductive 
according as it was or w^as not embodied in material form. 
The classing of the services of cook, waiter, valet, etc., as 
unproductive seems, even from the old point of view, to 
have been inconsistent, and the attempt to distinguish ser- 
vices by any such test is now wholly given up. Whether the 
service rests in material form for a week, a month, a year, 
or as often happens, for a much longer period, is not essen- 
tial. The test of the productiveness of services is not their 
embodiment in material form, but their appearance as psy- 
chic income, their ministry to wants. The most varied kinds 
of human activity may be unified by this thought in the 
concept of economic labor. 

§ II. VARIETIES OP TALENTS AND OP ABILITIES IN MEN 

1. As material things differ in their fitness to gratify Grades of 
wants, so do men differ in their powers of labor. The fields, labor are 

n -no 1-1 analagous 

hammers, plows, tools, and machinery of different kinds to grades of 

and qualities have been seen to grade off from the best to wealth 
the poorest. The poorest, discarded or just about to be 

13 



178 



LABOE AND CLASSES OF LABORERS 



[CH. 20 



Physical 
differences 
among men 



discarded, are no-rent agents. The utility felt and recog- 
nized in the better qualities is expressed in the rents they 
yield. Recognizing the variety and inequality of human 
talent, some economists of late speak of the "rent" of ability, 
meaning that, like land rent, the greater utility (and cor- 
responding reward) of some labor as compared with others, 
reflects the difference in the quality of agents. But this 
expression, though often met in contemporary economic 
writings, is one to be avoided because it tends to blur the 
essential distinction between human and other agents. Pur- 
suing the sam€ analogy some economists have talked of cap- 
italizing the worker,— expressing in a lump sum the value of 
the man as the present worth of the series of incomes which 
he may be expected to earn in his working life. This, also, 
is to be avoided, for while possibly it is suggestive in study- 
ing some problems, it is on the whole a misleading analogy, 
dimming the distinction between free-workers and owned 
and exchangeable wealth. 

2. The physical strength of workers differs according to 
age, individual, race, and sex. Differences due to age are 
the most obvious. The child, at first weak, grows toward 
his maximum of physical strength, which he attains before 
his fullest intellectual capacity. The period of maximum 
physical working power lasts fifteen to twenty-five years 
according to the individual, and then gradually declines as 
the old worker approaches again the inefficiency of the child. 
Mental efficiency develops more slowly and longer, the high- 
est qualities of judgment and wisdom being the fruits only 
of a life rich in experiences. Families and strains of stock 
differ notably in physical and mental powers; one excels in 
stature, another in development of muscle. The differences 
within families are inexplicable, sometimes one brother ex- 
celling in one thing, the other in another. The physically 
perfect man is a rare product. Among three thousand stu- 
dents are but two score endowed with the remarkable 
combination of lungs, heart, muscle, nerve, and character, 
that makes possible the finest athletes. The national and 



^11] VARIETIES OF TALENTS 179 

racial differences in working power, even in the simplest 
tasks, are marked but difficult to explain, as so many in- 
fluences of customs, habits of life, and varieties of diet 
modify the result. We cannot tell how much of the English- 
man's great superiority over the East Indiaman is due to 
individual, native differences of mind and body, how much 
to the social environment in which they have lived. Cer- 
tainly, though, the difference is not mainly one in size ; in the 
Chinese War the little brown men of Japan outmarched all 
the others. Certainly fiber counts for more than bulk, and 
character for more than muscle. 

A difference in the physical strength of the sexes is found Compara- 
in some degree throughout the world, but it would appear ^Jenrthof 
to be far more marked in civilized than in savage communi- men and 
ties. Compare the records at the Vassar field-games with ^°™®° 
that of the men in any leading college : in the hundred-yard 
dash, fifteen seconds as against ten and a fraction; in the 
high jump, forty-eight inches as against six feet and over. 
The muscular force of American college women as tested in 
the Yale and the Oberlin gymnasiums is but one third that 
of men, that is, taking all the students, the weaklings and the 
little men along with the athletes, and the women large and 
small. As to strength of back the average for men is 
154 kilograms, for women 5-4 kilograms; legs, average for 
men 186, average for women 76.5 ; right forearm, average 
for men 56, average for women 21.4. This is an abnormal 
difference. The natural and possible strength is more nearly 
attained by men than by women under our social conditions. 
Women escape the physical toil which strengthens, but not 
the mental strain which kills. Men carry more of the wood, 
but the women not less of the worries. A fairer test is 
applied among peasants in field-work in France and Ger- 
many, where the strength of women is found to be about 
two thirds that of men. American women should do and will 
do more to attain their natural strength when we attain 
sounder ideas of education and saner modes of living. 

3. Differences in intelligence are a resultant of native 



180 



LABOR AND CLASSES OF LABORER 



[C.H20 



Talent and 
training as 
factors of 
efficiency 



The moral 
qualities re- 
quired in 
industry 



talent and acquired ability. It is difficult to distinguish 
these two factors sharply. Two men sitting side by side in 
an examination, get the same grade ; one of them has had ex- 
cellent preparation from childhood, and all the opportunities 
that money, travel, and cultured associates can give; the 
other, under great difficulties, has prepared in a country dis- 
trict school with a little coaching now and then, and strug- 
gling against great odds, has at last entered college. The same 
grade does not mean that their natural ability or even their 
efficiency in this particular class, is equal. Yet the grade 
is the best expression to be had of their efficiency in the 
particular work. Native intelligence shortens the time 
needed for preparation in any calling ; hastens new methods ; 
decreases the cost of supervision ; saves materials, tools, and 
time ; diminishes loss from breakage ; makes possible the use 
of finer machinery and better appliances, and imparts those 
subtler qualities that distinguish the best from the mediocre 
products. Education and native talent are in a degree 
interchangeable; one supplements the other. Education in- 
creases adaptability; the trained mind will outstrip the un- 
trained mind of greater power. It makes direction easier, 
fits for higher tasks, and decreases the difficulty of 
cooperation. Any ability may be helped by education in the 
broad and true sense, though a fool cannot be made wise 
by training, and though many a potential genius doubtless 
has been dwarfed in dusty school-rooms by stupid teachers. 

4. The moral qualities of the worker are increasingly 
important as society grotvs more complex. The need of a 
particular moral quality is relative to the special task in 
hand. Honesty is needed in the bank teller, but he need 
not spoil a good story. The champion broncho-buster of 
Arizona is not a Sunday-school superintendent. So, disci- 
pline, obedience, self-control, regularity, and punctuality are 
needed, for more and more in these days business is run 
by the watch ; confidence, patience, good temper, in fact all 
the virtues in the calendar are necessary at some time aud 



511] 



VARIETIES OF TALENTS 



181 



place, and most of them are needed all the time in business. 
Places may be found in our developed society for those who 
are deficient in these qualities (it is fortunate that it is so), 
but these are the poorer places. Many men fail to examine 
the qualities necessary for success, and do not understand 
the causes of their own failure. Blind to their own faults, 
they are dropped down one notch after another in the scale 
of industry, and, equally blind to the virtues of their suc- 
cessful rivals, they rail against the unjust fates. 

5. Skill and capacity in industrial tasks is a resultant of 
many qualities. The simplest task calls for a combination 
of force and judgment,— even the digging of a ditch, the 
raising of a window, or the fitting of a stovepipe. For most 
industrial tasks rarer combinations of qualities are required. 
The retail clerk must be neat, punctual, polite, and long 
suffering. A confidential clerk must have discretion, judg- 
ment, and other moral qualities in an unusual combination. 
The substitution of qualities is possible within limits; a rare 
quality may make amends for the lack of a commoner one, 
and a man may, because of peculiar fitness in some regards, 
continue to hold a position for which in other ways he is 
little fitted. The rarest and most valued worker is one unit- 
ing many good qualities and fitted to deal with emergencies. 
The economic efficiency of the worker often is no stronger 
than its weakest link. A strong motive for training is 
offered by the fact that supplying some one lacking quality 
may raise the total efficiency in a remarkable degree. 

6. Biologic studies have of late made clearer the existence 
and continuation of the inequality of talents. The political 
philosophy of Ihe ei;^hteenth century was based on the idea 
of natural rights and natural equality. Adam Smith, ac- 
cepting the prevailing view, discussed wages on the assump- 
tion tliat all men had equal natural ability. It is still a 
favorite assumption of radical social reformers that the nat- 
ural ability of all men is equal, and that all the differences 
in success result froin political injustice. The study of 



The union of 
many quali- 
ties needed 



Inequality 
of talents 
shown by 
biologic 
studies 



182 



LABOR AND CLASSES OF LABORERS 



[CH. 20 



Scarcity ot 
labor is 
essential to 
wages 



biology of late has made patent the unending differences 
that prevail throughout the animate world. No two members 
of the same family or species are just alike; no two pigeons 
have wings of just the same length. Nature by numberless 
devices is experimenting constantly with variations on either 
side of the established mean. The accepted fact of biologic 
evolution rests on the foundation of inequality in structure 
and powers, making possible selection and adaptation. Men 
in all their qualities of mind and body display this kaleide- 
scopic variety. In all life there is inequality, and the whole 
drama of human history as well as that of biologic evolu- 
tion must be meaningless or illusory to the man who does 
not see this truth. Accustomed now to this point of view, 
we as inevitably think of the natural inequalities in men as 
did Adam Smith of their equality. 

This fact does not force to the conclusion that industrial 
inequality as it exists to-day, the great disparity of in- 
comes, correctly or justly reflects the degree of difference 
in men's qualities, either native or acquired. It does not 
follow that a thousand-dollar income represents ten times 
the ability of a hundred dollar one — far from it. But to 
those who ignore the inequality of men, the whole problem of 
industrial remuneration must remain a mystery. A crude 
socialism is possible only to those who are blind to the 
enormous differences in human capacity. 

7. The scarcity of human services, relative to wants, is^ 
iJie fnnda^nental fact in the proMem of wages. It is clearly 
seen that some qualities of service are scarce. Most women 
will confess that they cannot warble as Patti could, most 
men will admit that they have not the mercantile ability of 
John Wanamaker. The man of mediocre capacity recog- 
nizes even through the fog of his self-esteem that there is 
a reason for the high value of certain rare services. But it 
must also be recognized that the commonest services have 
value only because they are scarce. There are many things 
to be done if there were labor enough to do them. There is 



sn] VARIETIES OF TALENTS 183 

no need to "make work," in the popular sense; it is here, unlimited 
but labor is lacking to do it. It is true there may be a *«™^"<^^o'' 
temporary superfluity of human labor at a time of an indus- 
trial crisis. There is at all times a superfluity of " useless " 
human agents whose qualities are such that they have no 
net utility. The ignorant, insane, feeble-minded, vicious, 
drunken, and debauched, can give to the world only negative 
utilities. But services that are in any degree useful are 
nearly always in demand, and the higher services are so rare 
that they are in great demand. The proverb, " There's al- 
ways room at the top," is seen to be true when conditions 
are thus analyzed. There is a large, though limited, supply 
of the commoner kinds of services at the bottom of the scale, 
but in every branch of human eflfort there is a never-ending 
lack of that higher qualification and training required for 
the best results. 



CHAPTER 21 
THE SUPPLY OF LABOR 



§ I. WHAT IS A DOCTRINE OF POPULATION ? 

The em- 1. The Supply of labor means here not the number of 

pioyer'sand ^i;Qyj^(,yg available in ami one industry, but the number avail- 
view of able hi the whole field of industry. The individual employer 
iX'r^ °* thinks of the supply of labor as consisting of the men seeking 
employment in his special industry. In this view it is the 
demand by the employers that apportions the workers among 
the various occupations. The social view of the supply of 
labor, however, looks at the whole field. The demand for 
labor is then seen to be represented not by human employers, 
but by resources and agents presenting opportunities and 
demanding labor to employ them. The rich acre, the tool, 
the machine, all material wealth needing the human touch to 
give it a higher utility, represent a demand for labor in this 
broad sense. The thought of a supply of labor is therefore 
relative to that of the demand embodied in resources. A 
million men are a great or a small supply of labor according 
as they occupy a little island or a large continent, according 
as they are equipped with a small or a large supply of agents. 
2. "Supply of labor," as an economic problem, presents 
a large and complex case of diminishing returns. The popu- 
lation of different countries and of different sections of a 
country is seen to bear a general relation to their resources. 
An unintelligent race with little wealth and poor machinery 
is doomed to remain few in numbers. Mountains, districts 
poorly watered, the frozen regions of the North, are sparsely 

184 



Population 
in relation to 
resources 



51] WHAT IS A DOCTEINE OF POPULATION? 185 

populated because natural resources are lacking. If food 
production alone is thought of there are apparent exceptions 
to this statement, but there are no absolute contradictions of 
it. A favored harbor may make possible a flourishing com- 
merce on a rocky coast ; an unfertile soil may support a large 
population when great deposits of coal or iron insure by 
exchange great food-supplies. Productivity must be meas- 
ured under modern conditions by the purchasing power that 
is possible in the environment. The connection of wealth and 
resources with the extent of the population is in itself a recog- 
nition of diminishing returns, of an objective limit to the 
number of men that can occupy a certain area and employ a 
given stock of agents. 

3. Each species of the lower animals is seen to have a Equilibrium 
relatively fixed habitat limited iy its food-supply and hy its '^tween 

"^ ' o I ff o o numbers of 

enemies. The rocks tell a story of a slow and steady change animals of 

that has gone on in the earth and in the species of animals ^i^^r^nt 
^ . species 

that inhabit it. History records some rapid changes due to 
convulsions of nature or to interference by man with the nat- 
ural conditions. But the usual condition is an equilibrium 
of numbers, long maintained, though each species appears 
to have in itself a capacity for unlimited increase. Why this 
contradiction'? The limit set by the food-supply is seen in 
a simple case when herbivorous animals are placed on an 
island from which they cannot escape, and where there are 
no dogs, wolves, weasels, or foxes. Substantially this ex- 
periment was unintentionally tried on an enormous scale 
with the rabbit in Australia. This peculiar and long-isolated 
continent contained none of the rabbit's ancient enemies. 
The rabbits became a pest, devastated great areas, were 
hunted, trapped, poisoned, and great numbers of them died 
of starvation outside the fences erected to stop their advance. 
In the imaginary island they would increase up to the point 
where starvation would bring about an equilibrium between 
the number of animals and the food supply. The destruction 
of one kind of animal by another limits numbers in another 



of life 
germs 



186 THE SUPPLY OF LABOR [CH. 21 

way. The number of lions is limited by the number of their 
prey in the region where they roam. The number of deer, 
therefore, is limited in two ways, by the amount of their food 
and by the number of lions which catch the deer. The more 
numerous the lions, the fewer the deer; the fewer the deer, 
the greater the supply of vegetable food ; as the pressure in- 
creases on one side, it decreases on the other, until an equi- 
librium is reached. 

The surplus Throughout nature each species of animal keeps its custom- 
ary place, changing little despite its efforts to increase and 
to crowd into the habitat of other species. Even the slow- 
breeding elephant, with a period of gestation of three years, 
and producing one calf at a birth, would cover the entire 
earth and leave no standing-room in a few centuries if every 
calf born could live to full age. The myriads of frogs born 
every spring, the swarms of insects, the countless plants, are 
struggling to find a foothold on the crowded earth. Of the 
vastly greater number of seeds and embryos, only one in a 
multitude ever comes or could come to maturity. Here are 
the undisputed facts on which rests a biologic "doctrine of 
population," so to speak, for the vegetable and lower animal 
world. Because of the limited powers of the soil, no form of 
life, animal or vegetable, can continue to increase even for a 
single generation, without meeting enormous forces of oppo- 
sition, which destroy great numbers and set a limit to the 
increase of the species. 

These facts 4. A doctrine of human population is a reasoned explana- 

reiatedto ^^"^^j ^f fj^^ causes determininci ike number of people in the 

the doctrine . . . -^ . i t t 

ofpopuia- world. Man in his economic life is constantly struggling 

t'°° with the problem of the scarcity of goods. If in any given en- 

vironment men continue long to increase, they must, like the 
lower animals, meet limits in the capacities of the' resources 
they use. The supply of labor force which is thus brought 
to be combined with the material agents must meet with di- 
minishing returns unless these agents also continue to in- 
crease at a like rate. The relation of population to resources 



§11] 



POPULATION IN HUMAN SOCIETY 



187 



thus presents probably the most fundamental problem in the 
realm of economics. It is a problem of great complexity, bris- 
tling with difficulties, and incapable of exact mathematical 
treatment; but it is capable of rational study. There is a 
great difference between a purely fatalistic view of this 
question and the view that is to be reached by a consideration 
of the motives, causes, and physical influences at work. It is 
possible to find some principles in the chaos of prejudices and 
contradictions that the subject presents. The fruit of a cen- 
tury of discussion of the economic, social, and biologic factors 
involved, is a rational, if not a final, doctrine of population. 



^ II. POPULATION IN HUMAN SOCIETY 

1. In the earlier stages of Miman history, population is TheWoiogic 
limited mainly by biologic factors. The biologic stage con- ^tageof 
tinues so long as there are no artificial restraints put on the population 
birth-rate, and no deliberate destruction of offspring for the 
purposes of limiting the size of the family. There the limits 
are all objective; they are found in scantiness of the food- 
supply, or in destruction by enemies, animal or human. 
Each species has an average or normal birth-rate, great or 
small. Just why this varies, why the rabbit produces a score 
of young in a year, and the elephant but one in three years, 
is a question capable of a rational answer, but it is one for 
the natural scientist rather than for the economist. Each 
species is impelled by instinct to realize this birth-rate, to 
bring into existence as many young as possible. 

No human society known to us is so primitive that it has 
not passed this stage, but many societies have risen but little 
above it. In most savage tribes, where starvation, disease, 
and war are constantly at work, the difficult task is to main- 
tain the population. Few of those born arrive at maturity. 
The custom of the adoption of captives from hostile tribes is 
wide-spread, because the efficiency and even the survival of 
the tribe depends upon keeping up its number of warriors. 



188 THE SUPPLY OF LABOR [CH. 21 

War among 2. War for the possession of limited resources is the first 
primitive ,^.^^^^ social remedy for an excess of population. War is the 



societies 



normal condition of most primitive tribes. Its cause usually 
appears to be standing feuds and ancient enmities, but the 
deeper and abiding cause is the struggle for hunting-grounds, 
for pasturage, for natural resources. The rude industry and 
economy of hunting, fishing, or pastoral peoples, or of those 
in the earlier stages of agriculture, requires a large area for 
a small population. Distant excursions and frequent forays, 
when food fails, develop rival claims to favored districts, and 
war is the only settlement. Fighting under these conditions 
is an activity of such economic importance that much of the 
energy of the tribe must be strenuously given to it. The 
ceaseless loss of life in savage wars is almost incredible to 
modern minds. The invasion of the Roman Empire by the 
Teutonic tribes, the later successive inundations of medieval 
Europe by the fierce pastoral tribes from central Asia, are 
more recent and familiar examples of the economic and po- 
litical effects of the increase of population and of the out- 
growing of resources by barbarian peoples. When the custom 
arises of capturing enemies and reducing them to slavery 
instead of killing them, forces are set into operation to reor- 
ganize society and to create new checks on the growth of 
population, 
cnidebegin- 3. Volitional control of population begins hy the destruc- 
°'°^^°^ tion of offsprinq before or after birth. The population prob- 

volitional i ii ir ^ i < ^ _ • i • i 

control lem ceases to be simply biologic, and takes on its sociological 
aspect, when the awakening intelligence of man first grasps 
the mystery of birth, and when the first attempts are made 
in any way to regulate family relations or to interfere with 
the growth of numbers. The student of primitive peoples 
finds in the methods applied to prevent the birth of children 
an almost inconceivable brutality. The same methods to a 
large degree persist in savage communities to-day. Infanti- 
cide was generally practiced in ancient times among peoples 
of advanced civilization, as, for example, in Sparta and Rome, 



§11] POPULATION IN HUMAN SOCIETY 189 

where not only deformed and weak children, but unwelcome 
ones, commonly were destroyed. The practice, if not legal- 
ized, is at least permitted even to-day by public opinion in 
great portions of India, China, and other densely populated 
districts of the world. It is one of the dark spots on our own 
civilization. 

4. The pressure of increase of numbers on resources is Private 
coyifined by individual industry and by private property to ^^^ 
special portions of the population. A condition of commu- population 
nism, where all the members of the tribe or family share 
equally, means that all enjoy together when food and wealth 

are abundant, and all starve together when it becomes scarce. 
Along with a fierce enmity for other tribes, is found in many 
early societies a close approximation to tribal communism. 
Private property alters the nature of the struggle for sub- 
sistence and of the motives for limiting population. Society 
divides into a number of partially independent classes or 
family groups, each holding its share of wealth apart, not 
in common with the tribe. A society with private property 
is like a ship divided into a number of water-tight compart- 
ments. In communistic conditions if population increases, all 
sink together into want. The self-interest of those having 
private property keeps them from dividing their property, 
and starvation is confined to the propertyless members. 
This acts in two ways : it increases the motive for the pro- 
duction of wealth ; it gives a motive for the limitation of the 
consumers of the wealth. A smaller family with larger re- 
sources means a wider margin between numbers and mis- The problem 
ery. This converts the problem of population from a ma- ^P^y<^'''<^ 
terial one of a balance of food and physical needs, to 
a psychic one of a balance of motives in the minds of men. 
When this stage is reached, the extreme objective limit 
of the birth-rate or of increase of population is no longer at- 
tained in the well-to-do classes, although it may still con- 
tinue to be in the less provident. 

5. Volitional control is effective in very different degrees 



190 



THE SUPPLY OF LABOK 



[CH. 21 



Social 
classes 
differ in 
volitional 
control 



Motives in 

volitional 

control 



in different families and industrial classes. The possession of 
property is both a sign of forethought and an incentive to it. 
Concern for the welfare of children is one of the most pow- 
erful motives, especially after social distinctions become 
marked. It may become abnormally strong, leading parents 
to sacrifice their own welfare or their own lives foolishly for 
their children, as is done often in the accumulation of prop- 
erty. Among the classes with property the provision for the 
children depends not only upon the amount of wealth, but 
upon the number among whom it is to be divided. It is simple 
division : wealth the dividend, number of children the divisor. 

Among the poorer classes very different motives operate. 
After the first few years the parents' income is increased by 
the earnings of the children, both on the farm and in the 
factory districts if the laws do not prohibit child labor. 
Moreover, when the children are grown, their wages will de- 
pend on the general labor market, not upon the number of 
their brothers and sisters. So, according as the family in- 
come is from rents or from wages, the motives of the parents 
differ. 

Postponement of marriage must be classed as a mode of 
volitional control of population. The average age of mar- 
riage, both of men and women, is higher in the classes of 
greater wealth and ambition than in the poorer classes. The 
contrast in this regard between civilized and savage peoples 
is likewise noteworthy. The failure to marry, from whatever 
cause, is, in the social view of the question, volitional control. 
It is rare that the motive is directly and immediately the wish 
to avoid parenthood ; now it is religious zeal, again it is dis- 
appointed sentiment ; here it is conflicting duty, and there it 
is the individual selfish wish to retain an undivided income 
for one's own enjoyment. By countless strands of motive 
in the form of sentiments, social institutions, and interests, 
the primitive impulses of humanity are firmly bound; and 
in varying degrees, in different classes, the enormous possi- 
bilities of reproduction are controlled by human volition. 



many 



§m] CURRENT ASPECT OF THE POPULATION PROBLEM 191 



§ III. CURRENT ASPECT OF THE POPULATION PROBLEM 

1. Changes in population are resultants of many forces: The 
those favoring a high birth-rate and low death-rate, and ^°^}"'^l 

' if if ' controlling 

those limiting births or survival. Whether the population on population 
the whole shall grow, stand still, or diminish, depends upon 
the relative strength of contending forces making for life or 
death. But this control may lose its cruder aspect and may 
be waged in the realm of motive. More and more it is voli- 
tion that controls in human society the growth of population ; 
less and less it is the objective limit of the food-supply. Dire 
need resulting in ill-health and even in starvation, is still 
acting in some portions of society, but less to-day than ever 
before. The growth of population in this stage is not "fa- 
talistic," as there is no inevitable tendency to increase or to 
decrease. It depends on the interaction of a number of forces, 
clearly distinguishable, by which population actually is kept 
far within the limits of food resources. Volitional control 
is not by a central and unified despotism determining human 
action, but it is by motives of the most complex sort, diffused 
throughout society and acting upon every member of it. 

2. The desire to maintain and raise the standard of life is The stan- 
(lie most effective motive limiting population in our society, ^^rdofiife 

lu Asiatic 

The phrase "standard of life'' expresses the complex thought countries 
of that measure of necessities, comforts, and luxuries con- 
sidered by any individual to be indispensable for himself and 
his children ; that measure which he will make great sacrifices 
to secure. This standard differs from land to land, and from 
time to time. In the Asiatic countries it is so low that 
it touches in large classes the minimum of subsistence. De- 
spite adverse influences and the uninterrupted series of 
famines, the population of India in the last century under 
English rule increased from two hundred millions to three 
hundred millions. Such a population "lets out all the 
slack" of income, and never takes up any. The great public 



192 



THE SUPPLY OF LABOR 



rCH. 21 



The Ameri- 
can stan- 
■«ard 



The de- 
creasing 
death-rate 



works of irrigation, forestry, and transportation, and the 
development of industry under English rule, gave an oppor- 
tunity for a higher standard of living; but it was used in- 
stead to permit the existence of a greater number of men in 
the same old misery. These facts have a bearing upon the 
question of Oriental immigration to America. The emigra- 
tion of millions of Chinese from their native land would leave 
no void in their numbers. Peopling their own land con- 
stantly down to their own standard of living, they have the 
power, if they are tempted hither in great numbers, to people 
this continent also to the same density. 

The American standard of living, while it differs in differ- 
ent classes, is on the whole the highest found anywhere in 
the world. The increasing appeal to individual selfishness in 
the last twenty-five years, the greater ease of travel and 
taste for it, the multiplied and costly pleasures and pas- 
times, make children a greater and greater burden. The ab- 
normal conditions of city life increase the sacrifice required 
to support children, and take away a large part of the value 
of their services in the home. In the greater cities are whole 
areas larger than the city of Ithaca where children are not 
admitted to the apartment houses, where no one who has a 
child can rent rooms. Despite the increasing incomes of 
the masses of the population, the number of childless homes 
is increasing, and while the standard of comfort grows, the 
size of the average family dwindles. 

3. Greai improvements in medical and in sanitary science 
are decreasing the death-rate and thus partly neutralizing the 
effects of a loiver birth-rate. The death-rate in a community 
is a fairly good index of its general welfare. The death of 
a large proportion of the children before they arrive at ma- 
turity indicates poverty or ignorance. The death-rate in the 
Middle Ages, especially in cities, was tremendously high, but 
during the last hundred years has steadily decreased. The 
race of man which, ever since the beginnings of volitional 
control, probably has had a smaller death-rate relative to the 



§ III] CURRENT ASPECT OF THE POPULATION PROBLEM 193 

total number of individuals coming into existence than has 
any other species of living creatures, has to-day a far lower 
rate than ever before. Even in the most miserable industrial 
population where one half the children die before they are 
five years old, the death-rate is much less than among the 
young of the lion or the eagle. 

4. Volitional control is acting with the greatest force in The quality 
the more capable classes and thus threatens to reduce the ^^orcounts 
quality of the population. The quality of population is of 
more import than its quantity, alike in its economic, its social, 
and its ethical results. The productive force of a population is 
not measured merely by numbers. ' ' Who ' ' make up the popu- 
lation at any moment is no more a matter of indifference than 
' ' how many. ' ' One new-born child represents a negative addi- 
tion to society, unintelligent, incapable, foredoomed to become 
a burden; another, with energy, thrift, inventive genius, comes 
to enrich and uplift his fellow-men. Quality counts for much. 

The average number of children reaching maturity in the 
families of the American colonists was six ; the average num- 
ber to-day in families of American descent is about two. 
Since many of these do not live to maturity, and of those who 
do survive many do not marry, the stock does not maintain change in 
Itself in numbers. Much larger families are found among the f^f„^^^J 

^ ^ lean Dirtn- 

poor whites of the mountains, the foreign population, the rate 
negroes, and, in general, in the lower ranks of labor. Forces 
are at work to sterilize or reduce in number the more intelli- 
gent elements of the population. The "new woman" move- 
ment, tempting into "careers," takes away from family life 
many of the women most worthy to become the mothers of 
succeeding generations. Self-interest is at war with the 
social interest. The individual asks, "Am I bound to sacri- 
fice my comfort and happiness to the general good?" If 
this continues, the result must be a steady decline in the pro- 
portion of the population born of the successful strains of 
stock, and a steady increase of the descendants of the medi- 
ocre and duller-witted elements. 

13 



194 



THE SUPPLY OF LABOR 



[CH. 2] 



Rate of in- 
crease in the 
nineteenth 
century 



5. 



Conclusion 



Population increased at an unprecedented rate 
iliroughout Christendom in the nineteenth century, hut the 
pace is now slackening. The nineteenth century saw a great 
increase in the food-supplies available for Europe. The re- 
sources of the American continent were hardly touched until 
the great Western movement of population began and new 
agencies of transportation brought American fields thousands 
of miles nearer to European markets. The improvement of 
machinery and of other economic equipment in Europe like- 
wise aided to increase production rapidly. Population fol- 
lowed, though not with equal step. Europe had a population 
of 200,000,000 in 1800, nearly 400,000,000 in 1900. The in- 
crease in England was from 12 to 18 per cent, each decade ; 
it had 8,000,000 in 1800 and 30,000,000 in 1900. The United 
States had 5,000,000 at the beginning of the century and 75,- 
000,000 at the close, an increase of over 30 per cent, each 
decade. Recently there has been a notable decline in the 
rate of increase in all the countries of Europe. France is 
already at the stationary stage, and England probably will 
have reached it by the middle of the century. The rate of 
increase by decades has fallen in America from thirty-three 
to twenty-four since the Civil War. Though the movement 
of the population is still upward, large classes are stationary 
or declining in numbers. 

Population should increase more slowly than wealth and 
resources if progress is to go on. It has done so in the past 
century, and there is no probability of a too rapid increase 
in Christendom in the near future. A stationary or declin- 
ing population, while not desirable, is not an impossibility. 
But this does not destroy the significance of the fact that 
there is inherent in humanity a great potential power of in- 
crease, the realization of which would be disastrous, the con- 
trol of which is an important and ever-present condition of 
the social welfare. 



CHAPTER 22 
CONDITIOiXS FOR EFFICIENT LABOR 

§ I. OBJECTIVE PHYSICAL CONDITIONS 

1. The efficiency of labor, in its broadest sense, is its abil- subjective 
iiu to render services or produce thinqs that minister to ^^°y^- 

"' . . tive factors 

welfare. The efficiency of labor is a resultant of many in- of efficiency 
tluences. In part it depends on the physical and mental 
powers of men ; in part on things outside of the worker that 
either stimulate and strengthen him, or give him more fa- 
vorable conditions in which to work. These are respectively 
the subjective and the objective factors of efficiency. In its 
broader sense, therefore, the phrase "efficiency of labor" 
implies any and every influence that makes for a larger and 
better supply of goods. 

2. The efficiency of labor is limited objectively by the Bounty and 
abundance and qualitii of material resources. ^Material re- go<''^°essof 

-' ^' ' productive 

sources include both those called natural (as the field and agents 
its fertile qualities), and those called artificial (as improve- ^^^^^^f 
ments and machinery). According as these resources are labor 
more or less developed, as labor is employed in a fertile or a 
barren field, with a sharp tool or a dull one, with a highly 
developed machine or a poor one, the product is more or less. 
If resources were much more abundant than at present, 
many goods now scarce would become almost, or quite, free. 
In the last chapter it was shown that an increase of the 
labor in a limited area or with a limited supply of indirect 
agents results in a decline in the relative bounty of the 
environment. A certain part of the result is thought of as 

195 



196 



CONDITIONS FOR EFFICIENT LABOR 



[CH. 22 



Causal 
relation of 
wages and 
efficiency; 
food 



An experi- 
ment in 
feeding 



due to material agents, a certain part to labor. " Efficiency 
of labor " is thought of in the narrower sense as the part of 
the product that is logically attributable to labor,— the labor- 
er's contribution to the value of the product, — as apart from 
rent, the part attributable to material resources. 

3. The laborer's efficiency is greatly affected by the qual- 
ity of his food, clothing, and shelter. Usually workmen that 
are getting good wages enjoy abundant food and creature 
comforts ; poorly paid Avorkers go scantily fed. The question 
arises : which is cause, which effect ? Some maintain that all 
that is needed to make workmen more efficient is to feed them 
well. In some cases this is probably true. The Porto Ricans 
enlisted in the American regular army are reported to have 
increased at once in strength, weight, and vigor; the Fili- 
pino recruits, thanks to the American army rations, soon 
outgrew their uniforms. Some employers in Europe pay 
their workmen an extra sum on condition that it is spent for 
meat. But if wages increase, it is by no means certain that 
more or better food will be bought or if it is that the work- 
men's powers will be increased. There is a limit to the 
benefits of increasing food. There is some reason to be- 
lieve that in America great numbers of our people, perhaps 
even many manual laborers, would be better off if they 
bought simpler and less costly food. The maximum of 
health and vigor may be attained with moderate outlay, and 
beyond that point richer food doubtless does more harm 
than good. Poor judgment in the selection of food is shown 
in many workers' families, and there is no appreciation of 
its influence on health. 

A few years ago an experiment in the feeding of pigs was 
tried on the Cornell farm. Four groups of six pigs each 
were put in four different pens and fed four different ra- 
tions. Though alike in breed and age, the groups began at 
once to differ in character. One group squealed more; 
another scratched more ; another waxed fat faster. Every 
week they were weighed, and finally were butchered, hung 



§t] 



OBJECTIVE PHYSICAL CONDITIONS 



197 



up, and photographed. At that same time, at the Elmira 
Reformatory Mr. Brockway was expermienting on some 
criminals of the lower class. They were given daily baths, 
special physical exercises, and were fed on a specially boun- 
tiful diet. Scientific philanthropy stopped there, but 
photographs " before and after," reproduced in the printed 
reports, show the great physical improvement that resulted, 
and a marked change occurred likewise in disposition and in- 
telligence. i\Iany laboratory experiments have been made of 
late to test the chemical nature and the physiological effects 
of foods. It is becoming more fully recognized that the qual- 
ity and quantity of food, and the cooking of it, have a great 
influence on the economic quality of the worker. 

The effect of the quality and amount of clothing, while of clothing 
course varying with the climate, is in general of less prac- 
tical importance. Loss of heat and energy, dulling the 
powers, stiffening the muscles, causing illness with many 
trains of evils, make ill-clad workmen inefficient. The cost 
of clothing enough for comfort is, however, comparatively 
small, the amount spent for ornament is comparatively high. 
Even more important in its effects on efficiency is housing. 
The conditions in the factory and in the home make for 
health or for disease. 

4. The growth of society is, for the hverage man, making Physical 
some of the conditions of efficiency more difficult, others surrounding 
more easy, to secure. In agricultural and sparse populations labor grow 
fresh air, sunshine, good water, and unbounded natural ^°''®^°'^ 
playgrounds for children, where they can grow into strong 
and efficient manhood, are free goods. As population grows 
more dense, these things become more difficult to secure ; men 
are brought into unnatural conditions, the evils of slum and 
factory life develop, and the housing problem appears. 

The character of the housing and working places could 
well be left to individuals in early times. If the individual 
chose to live and work in unsuitable places and under un- 
sanitary conditions, it was usually his own fault and he bore 



better 



198 CONDITIONS FOR EFFICIENT LABOR [CH. 22 

the consequences. When the unsanitary conditions about 
each family are visited upon its neighbors, society must deal 
with them. Engineering, sanitary science, and medicine 
must be directed against the evils; factory and tenement- 
house legislation must seek to make possible a decent life in 
the cities, the factories, and the homes. Indeed, in many 
places the development in these and other directions has 
enabled the mass of the workers to enjoy blessings impossible 
to the most favored in the past. 

§ II, SOCIAL CONDITIONS FAVORING EFFICIENCY 

Government 1. The first sociol conditian for the workers' efficiency 
to insure ^^ political securitii. Por the same reason that this condition 

the reward ^ "^ . . . . „ 

to labor is favorable to the growth of capital, it is essential if men are 
to labor in the present and for the future. As the framers 
of the Constitution expressed it, the function of govern- 
ment is to insure domestic tranquillity, provide for the com- 
mon defense, and insure the blessings of liberty to the 
citizen. Directness and certainty of reward are more essen- 
tial than mere size of reward in insuring action and effort. 
There must be a close relation between work and the fruits 
of work. Political insecurity weakens this relation and 
makes the reward dependent on chance. 
Common 2. The prevalence of standards of honesty in private 

condfti^^t^ rtVitZ public busincss is a condition to high efficiency. Cor- 
efficient ruption in government has the same effect as political in- 
^^^ security; in fact, it is but another form of it. We are 

accustomed to the thought that in an Asiatic despotism 
a worker beginning a task is uncertain whether he will 
reap the reward, as public officials may at any moment 
seize upon the fruits of his labor. But in our own country 
similar evils are not entirely lacking. Assessments often are 
unfair, and justice sometimes is bought. Men in high execu- 
tive positions are able to make or mar the fortunes of their 
followers. Sometimes a legislator from a country town goes 



^11] SOCIAL CONDITIONS FAVORING EFFICIENCY 199 

to the state capital poor and returns rich. Such things 
becoming generally known tend to break down the motives 
to industry. They breed the notion that wealth is more 
dependent on chance or jobbery than on efficient service. 
Dishonesty in private business means the use of energy not 
to produce wealth, not to add to the sum for all to enjoy, 
but to get it from some one else. Public corruption and 
commercial dishonesty alike entail on the industrious not 
only the immediate loss, but the far greater cost of weak- 
ened character, relaxed energy, and decreased efficiency of 
labor. 

3. Custom and social ideals that raise or depress hope effect of 
and ambition, affect efficiency. The institution called caste, c^steon 

efficiency of 

which fixes the place of the worker and makes it impossible lower and 

to rise out of the social position in which he is born, and "pp^"" 

classes 
disgraceful to do any work reserved to other castes, is dead- 
ening to energy. It exists in some form throughout the 
world, and where it is not called by that name, the same 
caste spirit is at work. The European peasants in the Middle 
Ages lived under the shadow of it. 'Where slavery exists 
the master class at times feels its hardships. "It is not so 
hard to live," says the hungry Creole daughter in " The 
Grandissimes, " " but it is hard to be ladies. . . . We 
are compelled not to make a living. Look at me : I can cook, 
but I must not cook; I am skilful with the needle, but I 
must not take in sewing ; I could keep accounts ; I could 
nurse the sick; but I must not." Nowhere in the world is 
there less caste than in America, but it is here. The negro's 
low measure of industrial virtues is partly the cause of the 
prejudice against him, but in turn doubtless inherited class 
feeling is in some measure the cause of his inefficiency. To 
close to a worker all but the menial occupations is to take 
from him the most powerful motives for effort. The thought 
is paralyzing. The race problem in America is in part one 
of caste sentiment, whatever can or cannot be done about it. 
Democracy makes for the efficiency of American industry 



200 



CONDITIONS FOR EFFICIENT LABOR 



[CH. 23 



labor 



American not less than do the great natural resources. If America is 
^^'dTb^'^^ to surpass the world in all the great industrial lines, it will 
efficiency of be largely because of her ideas and institutions. They lead 
to greater energy and to a faster working pace in all grades 
of labor than is found anywhere else in the world. There 
is danger that as the West is closed to settlement something 
of the spirit of enterprise will be lost. To Western eyes 
already the young men in the older East seem to be tram- 
meled by social conventions. In an older community there 
is less of hopeful ambition; one's position depends more on 
what his fathers achieved; in the new community, more on 
what he does himself. If it is true, as wise students declare, 
that the frontier has been the nursery of our democratic 
ideas, we may well ask what effect the closing of the frontier 
will have on our national sentiment and on our material 
prosperity. 

4. Custom and national temperament affect the efficiency 
of labor hy determining the normal period of labor time. 
tween work After the bare necessities of life are provided for, the worker 
and leisure -^^^ ^ wide or narrow margin of productive energy to use 
as he pleases. If four hours' work a day would enable him 
to live, will he work longer or will he stop? The answer is 
determined by the balance of utility and disutility. Will 
additional hours of labor yield more gratification than idle- 
ness yields 1 Does the pain of toil repel more than its fruits 
attract? The use made of spare time differs according to 
climate, race, and temperament. In the tropics the margin 
is converted usually into loafing, in the temperate zones 
largely into objective forms of enjoyment. Individual differ- 
ences are plainly seen when each man labors on his own 
field. The prudent man, in the old maxims, makes hay while 
the sun shines and ploughs deep while sluggards sleep. In 
the modern larger organization of industry, working hours 
are much the same for all workers in the establishment. In- 
dividual preferences are still expressed, however, in irreg- 
ularity of employment. In the South some manufacturers 



The balance 
of advan- 
tage be- 



§1U] DIVISION OF LABOR 201 

have found that on an average the negroes will work in a 
factory not more than five or six hours a day, working ten 
hours for four days and lying off two days a week. Such 
a standard of working hours is the mark of the primitive 
stage of wants and industrial qualities, although a shortening 
of the hours of manual labor, as incomes increase above bare 
subsistence, is in accord with a rational valuation of leisure. 
A moderate change in that direction cannot but increase 
rather than diminish the efficiency of labor. 

§ III. DIVISION OF LABORSv. 

1. Division of labor is a ierm expressing that complex Division and 
arrangement of industrial society ivhereby individual ^^''^"g^o* 
ivorkers are enabled to apply themselves to the production 

of certain kinds of goods, securing others by exchange. 
The term ** division of labor" is simple, but the thought is 
a complex one. Its full discussion would cover the whole 
field of political economy, but only its most essential as- 
^pects can here be touched upon. Division of labor and 
exchange are counterparts and mutually determine each 
other. Division of labor depends on the extent of the mar- 
ket, and in turn widens its limits. The number of articles 
that any one would care to produce at one time and place 
depends upon the opportunity to exchange them. These two 
aspects of industry thus are inseparable in thought and 
practice. The worker finds division of labor existing as a 
social institution and, according as he adapts himself to it 
wisely or foolishly, it increases more or less his efficiency. 

2. Division of labor is primarily between individuals, Division 

but appears between trades, territories, and nations. In °*^^^ 
' ^ ' . . J. between 

division of labor between trades, each worker applies himself trades and 

to the production of some product or group of products and te^itones 

secures other goods by exchange. A special form of this is 

territorial division of labor, arising out of differences in 

soil, climate, and natural products, when each community 



of division 
ol labor 



202 CONDITIONS FOR EFFICIENT LABOR [CH. 22 

develops in a high degree some one class of products to ex- 
change in distant or foreign trade. Division of labor begin- 
ning because of such natural differences, becomes fixed by 
habit and training, by the advantage of a larger and regular 
labor supply, by the economy of nearness to related and 
tributary industries, and by the use of waste products where 
industry is conducted on a large scale. The natural advan- 
tages in another district must be large to enable it to start 
successfully against these acquired economies, and territorial 
division of labor thus tends to continue for long periods 
when once established. 
Advantages 3. Division of labor increases efficiency by: (a) increas- 
ing skill; (6) saving time; (c) saving tools and materials; 
(d) improving quality; (e) increasing knowledge; (/) 
stimulating invention; (g) encouraging enterprise; (h) 
€c07iomizing talent. There is a tradition that an ingenious 
lecturer in one of our universities was accustomed to give 
to his class eighty reasons why division of labor was of ad- 
vantage. It is none too many, as every reason for the 
modern, as contrasted with the primitive, organization of 
industry should be included. The phrase division of labor 
is but a synonym for specialization, a word that expresses all 
that is most characteristic of our complex industrial society. 
The headings just given may serve, however, to suggest the 
leading phases of the subject. Repetition of the same task 
trains the muscles, forms a mental habit, and gives the 
swiftness and deftness of touch called skill. Specialization 
saves time by making unnecessary the physical change of 
place for the worker, the frequent shifting of tools, and 
the mental readjustment required for the undertaking of 
a new task. Specialization saves tools for, either each kind 
of work must be most ineffectively done, or there must be 
provided for each worker a complete set of tools which thus 
will be used rarely and will rust out rather than wear out. 
If a few tools are thoroughly used, they yield a larger income 
on the investment, and require less care and repairs in pro- 



^lU] DIVISION OF LABOR 203 

portion to their uses. In fact this fuller economic use of 
machinery and plant where a large product is turned out 
at one place, is a prime factor in the advantages of large 
production, a subject to be treated elsewhere much more 
fully than is here possible. By specialization is made possible 
a quality of goods never to be secured by the less skilled 
efforts of the Jack-of-all trades. The specialist steadily 
grows in kjwivledge of his materials and of the best pro- 
cesses, and he gains a power of delicate observation and 
facility in meeting new difficulties that are impossible when 
attention is divided among a number of tasks. By dividing 
and simplifving processes, specialization stimulates inven- 
iion. The most complex machines have been developed grad- 
ually by combinations and adaptations of simple tools, and 
the more a process is subdivided, the greater is the chance of 
hitting upon a device to repeat mechanically the few simple 
movements. Division of labor increases the motives of emu- 
lation and enterprise, by making possible the more exact 
comparison of results. It economizes talent by giving to 
each the highest task of which he is capable, while fitting the 
less efficient workers into the minor places made possible by 
subdivision. In an American wagon-factory, a one-armed 
man operating a machine is turning out as large a product 
and earning as high wages as any other employee. The same 
advantages of specialization are found with modifying con- 
ditions in educational and professional lines. The marvel- 
ous progress of science in recent years has been made 
possible by each worker's doing a few things and doing 
them well. 

4. The individual worker, to attain his highest economic Bestadjust- 
efficiency, must select from the occupations made possible by "ig^t^^nd 
division of labor the one for which his talents are best fitted, occupation 
Tt seems unnecessary to state this almost axiomatic truth, 
yet the slight reflection given to the choice of an occupa- 
tion by most young people gives to this statement a very 
practical bearing. The world is filled with industrial mis- 



204 CONDITIONS FOR EFFICIENT LABOR [CH. 22 

fits, "round men in square holes," good carpenters spoiled 
to make poor doctors. It so often happens that the natural 
aptitude of the youth is the thing last or, in any event, least 
considered. Unreasoning imitation, family traditions, pa- 
rental wishes, class pride, social prejudice, childish whim, 
are often decisive of the life career. Happily in some 
cases, before too late, the man " finds himself," but too 
Choice of a often the poverty of the family and the obstacles to educa- 
tion preclude the exercise of intelligent choice. It is of 
importance to society as well as to the individual that talent 
should be discovered in time, that tasks should be fitted to 
aptitudes, that each member of society should attain to his 
highest efficiency. The approach to this ideal, made possible 
by popular education, the decline of caste, the spread of 
genuine democracy, the progress of social justice, will in- 
crease not only the workers' efficiency, but society's abiding 
welfare. 



life career 



CHAPTER 23 
THE LAW OF WAGES 

§ I. NATURE OP WAGES AND THE WAGES PROBLEM 

1, Wage in the hroad sense is the income due to labor, wages and 
in distinction from that due to the control of material agents, '■^^t <^°"- 

' ' '^ pared and 

The uses of material agents, studied under the subject of contrasted 
rent, are sometimes called " material services." The adjec- 
tive refers to the source or bearer of the use, and does not 
imply that the service is to be thought of as a material 
thing. In its last analysis a service is never a material 
thing, but a psychic effect on men and their wants. Material 
services and human services are merely specific kinds of the 
genus services (or utilities), and it would doubtless be a 
better usage to speak of labor's services and wealth's uses. 
Wages bear the same relation to man's services that rent does 
to the material uses of wealth. Wages are more like rent 
than like interest in that neither wages nor rent are ex- 
pressed as a percentage. While rent is the value of the uses 
of things, wages is the value of the services of men. In 
discussing interest, wealth is capitalized; but, in discussing 
wages, men are thought of as affording utilities for a 
time, as is wealth under the renting contract. The resem- 
blance thus is very close between rent and wages, but not so 
close between wages and interest. 

Despite this interesting analogy, it is not well to speak, 
as some do, of "the rent of labor"— as well might one speak 
of the wages of wealth. Such a usage only beclouds the 

205 



206 



THE LAW OF WAGES 



ICH. 23 



Nature of 
the law of 
wages 



Economic 
wages and 
contract 
wages 



distinction between two concepts, suggesting identity where 
there are important differences. The aim of scientific classi- 
fication is missed when contrasts are thus concealed under 
a single term. 

2. A law of wages is a statemenl uf the relation of the 
(jeneral causes of value to the value of human services. 
In real life no one agent is valued independently of other 
goods. The felt importance of a good depends on the degree 
to which other wants are gratified. If men are starving, they 
attach less importance to ornaments; if cold, more im- 
portance to clothing and fuel, being willing to part even with 
some needed food to secure them. That is, man's desire for 
each thing is affected by his general condition and by the ex- 
istence of other goods and wants. A similar relation exists 
between the values of indirect agents, and must exist be- 
tween wages and rent. 

We are to discuss the law of wages. An economic law 
does not state a command ; it is not a political law ; it states 
merely an observed relation. Things do not need to happen 
actually according to any law of wages that can be formu- 
lated, but they will happen in the measure that the assumed 
conditions exist. The law states a tendency of wages, just 
as the law of gravitation states a tendency and does not 
predict positively whether a given object will fall at a given 
moment. The 'Maw of wages," therefore, is to be under- 
stood as a hypothetical statement of the value that will be 
attributed to labor under a given set of conditions. 

3. Economic ivages are the value of human services in 
the broad sense; contract ivages are the goods paid hy one 
man to another according to an agreement. In discussing 
rent and interest, we have become familiar with this im- 
portant distinction between economic and contract values. 
Economic wages are fundamental, the primary subject of 
theoretical study. Contract wages are the wages paid by 
one man to another in accordance with an agreement, and 
may not at this moment coincide with economic 



wages. 



§1] NATURE OF WAGES AND THE WAGES PROBLEM 207 

When the contract was made, one party may have been 
ignorant or helpless, and have failed to get all he now could ; 
or meantime the conditions may have changed. But contract 
wages are based on economic wages and tend to conform 
to them. If one person performs services for another with- 
out expecting to receive economic goods or services in re- 
turn, it is a gift, not wages. A workman can get as contract 
wages the amount of his economic wage if free competition 
exists and he acts intelligently. Of course, these are im- 
portant conditions. 

Real and nominal wages must be distinguished: real wages 
are the reward of labor as measured in goods and enjoy- 
ments; nominal wages are the reward expressed in terms 
of money, whose purchasing power varies from time to 
time and from place to place. 

4. Human services, being one of the conditions of psy- scarce 
cliic income, h^ar the same relation to ivants that material ^^'^.^^ 

. gratify 

goods hear. As the material agents that are fitted to gratify wants 
wants are scarce, laboi' is applied to the outer world to 
change and adapt it, thus making it answer desire better. 
Labor, thus, in many of its applications merely supplements 
the bounty of nature. Men have a use to and for each other ; 
they have a relation to other men's welfare similar to that 
borne by material things. The different human actions have 
all grades of relation to gratification, from harmful to help- 
ful, just as things have. According to their relation to this 
scale services therefore become ranked either high or low in 
the estimation of men. Some acts are negative services, 
to use the term service in a paradoxical sense ; they are 
things to be avoided and escaped. Value then is attributed 
to the services of men according to their rank in this scale, 
just as it is to the uses of agents in the case of rent. 

Scarcity is the condition of value in labor, as it is of value 
in any good; but scarcity is a relative term. The commonest 
kinds of labor would not ordinarily be called scarce, but 
compared with their possible desirable uses, they are scarce, 



208 



THE LAW OF WAGES 



[CH. 23 



The sim- 
plest case of 
economic 
wages 



Wages of 
the self- 
employed 
exchanging 
worker 



and this fact is the key to a large part of the wage problem. 
The question is: how and in what degree does this scarcity 
cause value to attach to labor? 

§ II. THE DIFFERENT MODES OF EARNING WAGES 

1. The self-employed laborer earns wages in the broad 
economic sense. In this sense the isolated workman, Robin- 
son Crusoe on his island, earns wages, but these wages could 
not be measured at all exactly. They are a part of an indi- 
visible income, and there is no way to determine how much 
should be attributed to the uses of the wealth employed and 
how much to the labor. The independent farmer, producing 
on his own farm nearly everything he consumes, may be said 
to earn wages in the broad sense. These can, moreover, be 
estimated, because they can be compared with what he 
could get by working for some one else.- The farmer, 
therefore, attributes a certain part of his income to the 
farm as rent and a certain part to his own labor as wages. 

2. The wages of self-employed labor are often simply the 
value of the material product it secures by exchange. Labor 
has value indirectly because embodied in products. The 
value of these products is reflected to the labor which secures 
them. The wages of the fisherman day by day, as he follows 
his vocation, are simply the market value of the fish he 
catches day by day. The gold-miner, working with simple 
tools in the days of placer-mining, earned wages exactly 
expressed by the gold he washed out. 

The independent worker with few tools does not think of 
attributing any considerable part of his income to his tools. 
The umbrella-mender's "kit" is so small that his true wage is 
little less than his total receipts. The tinker, the shoemaker, 
and the tailor, who went from house to house in the old 
days, thought only in the vaguest way of marking off from 
their incomes a part to be counted as the rent of their little 
outfit of tools. Until very recent times the capital invested 



5 III THE DIFFERENT MODES OF EARNING WAGES 209 

ill tools commonly was small, and usually was owned by the 
handworker who thus received an undivided income, of 
which wages w'ere by far the larger part. It was inevitable, 
therefore, that labor alone should have been thought of as 
the cause of the value of goods produced by the artisans in 
the towns and cities. This error, small at first, w-as magnified 
as the capital investment of modern industry grew, and it 
persists in many fallacious notions that still taint modern 
economic theory. 

3. Contract wages, paid hy an employer, rest on the same Both 
cause of value, the direct or indirect effect of labor in the ^1^^^°^^^^ 
gratifying of wants. When contract wages come to be causes of 
spoken of, the personal element of bargaining between man ^"^^g*^* 
and man comes in to obscure somewhat the impersonal causes 
that are operating. If the fisher and the miner bring their 
products to the general markets, the impersonal part of the 
problem is uppermost and the wages are recognized to be 
the market value of the material products. But if an em- 
ployer hires a number of workmen, and the labor of each 
becomes merged and lost to view in a complex product, the 
uncritical mind stops, loses all hold on a guiding principle 
of value, and sees only the superficial fact of a personal 
bargain between employer and workman. Such a view over- 
looks the logical cause of value, and the network of imper- 
sonal forces which enwraps and binds the personal acts. 

To begin with the simplest case: workers often are tem- a single 
porarily employed to produce for others means of gratifica- ^"^^^^^^ 
fion at once consumed. The barber shaves his patron, the service 
ferryman takes the traveler across the river, the boy carries 
a message, the surgeon sets a broken bone. Each performs 
a useful service, but produces no long-abiding material re- 
sult outside of the beneficiary, and no separable, salable 
material good. When each is paid according to the value 
of the gratification afPordod, the first step is taken toward 
the regular contract-wage relation between man and man. 
In ordinary domestic service the only condition not pres- 
u 



210 



THE LAW OF WAGES 



[CH. 23 



The con- 
tinued wage 
contract 
for personal 
services 



Labor em- 
ployed on 
products 
exchanged 



ent in the cases just given is the more abiding character of 
the contract relation. The employer does not hire a coach- 
man each time he wishes to take a ride, but having summed 
up the advantages of a coachman's services, he buys them 
by the month or the year. The price is determined in the 
market for coachmen of the needed ability, qualities ranging 
from stupid to bright, from weak to strong, uud from drunk 
to sober. Instead of buying flowers from day to day, a 
wealthy man hires a gardener to cultivate them in a conser- 
vatory. The average market price of flowers influences the 
wages paid to the gardener, his wages being but the sum of 
the values (or of his contribution to the values) of flowers, 
well-kept lawn, and garden products. According to the con- 
ditions of each household and of the general market, the one 
or the other mode of buying these utilities is the more ad- 
vantageous. 

4. The payment of the laborer to produce goods for ex- 
change is the most common modern case of wages. The 
relation of wages to the value of the product is in this case 
more complex, for the employer is directing the labor to 
gratifying the wants of others, not his own wants. It is 
the desire of prospective customers for the product, and the 
chance of exchanging it, that will eventually enable the 
employer to recover the amounts paid to laborers. Labor 
is only one of the elements entering into the product. 
Within limits it may be substituted for the other elements, 
fewer machines being used and more laborers, or vice versa. 
No more will be given for any labor than it is expected' to 
add to the value of the product. As employers test by 
experience the contribution of the marginal labor to the 
value of the product, labor is constantly compared with the 
value of other things. 

When industry becomes complex, the connection between 
the wa^es and the value ultimately realized in the product 
may be broken for a time, but rarely for a very long time. 
Because of miscalculations, labor is employed on things that 



§illj WAGES AND THE LAW OP VALUE 211 

prove to be quite valueless, aud ou other things that have 
a much greater value than was expected. When months or 
years intervene before the value of the labor is realized in 
the sale of the product, the employer must forecast the out- 
come as best he can, and employ labor only when the w^ages 
promise to be recovered. These are complicating facts, but 
in any logical view they do not falsify the principle that 
wages are determined by their prospective contribution to 
the utility of goods. 

5. The ivages paid hy the various methods of remimera- various 
Hon— as, hy time, hy the piece, hy premium for out- methods of 

, „ . . I ) J t^ I remunera- 

put—atl conform in a general way to the economic value tion, but 
of the service. ]\Iany methods are employed to measure the °°egeiierai 
services of wage workers. If time is used, a general or 
average output is assumed, and the workman must come up 
to that standard if he is to hold his place. If payment is 
by the piece, the price per piece must be enough to make 
possible the prevailing time-wage to Avorkers of that 
grade if the supply is to be maintained in that industry. 
The convenience of the different methods of payment varies 
from industry to industry, and even from task to task 
within the same factory, so that now one, now another 
method is followed. In any case, however, the aim is to find 
some convenient measurement of the rate of labor, and of 
its contribution to the value of the product. 

§ III. WAGES AS EXEMPLIFYING THE GENERAL LAW OF VALUE 

1. Each grade of labor is a potential supply of desirable Ratio of 
things and its wage is determined in essentially the same way ^^^^s^ °* 
as if it were an actuM supply. If all the various psychic adjusted to 
goods that labor produces were spread out before men in 
visible form, some would be in great demand, some w^ould 
exchange in a very unfavorable ratio with others. The ex- 
change would come to equilibrium at a point where each 
buyer had adjusted his supply of enjoyments in the most 



their mar- 
ginal utility 



212 



THE LAW OF WAGES 



[CH. 23 



Differences 
in wages 
persist 



Various 
grades of 
labor and 
rates of 
wages 



favorable way, had so distributed his purchasing power as 
to get those kinds and amounts of services which afford him 
the highest possible sum of enjoyment. 

In this situation the real wages of some being so much 
more than those of others, the low-paid workers will have a 
motive to change their occupations. But the various laborers 
have limited abilities and cannot change at will and, despite 
the unfavorable ratio, they may be compelled to continue 
at the same work. Just as apples cannot become peaches or 
sheep become horses when there is a change in their price, 
so the unskilled workman cannot become skilled quickly, 
if he ever can, and the possibility of changing occupations 
within any reasonable period is very small indeed. Labor 
is constantly trying to adjust itself, to get into the better- 
paid industries. It moves, it emigrates, it seeks training and 
education. Especially the workers between the ages of fif- 
teen and twenty-five choose the callings that promise the 
highest reward. Within limits an adjustment is possible, but 
these limits are not wide and not quickly shifted, and the 
wages of labor continue diverse in different occupations for 
an indefinite time. 

2. The term general rate of ivages can he used only of 
a certain grade of labor and of the rate for the average 
ivorker. Every grade and kind of ability has its rate of 
w^ages. To be sure, it is sometimes convenient to speak in 
a broad but inexact way of " a general rate of wages," 
when comparing different countries and periods. When it 
is said that the rate of wages is higher in America than in 
England, in England than in France, in France than in 
India, the comparison is between men of the same occupation 
in the different countries; e.g., the unskilled laborer or the 
mechanic gets more here than the same grade of laborer 
gets in England. There is no such thing as a general rate 
of wages extending throughout all industries. 

The different grades of ability differ more markedly 
than do industries compared as wholes. In 



m 



wages 



§111] WAGES AND THE LAW OP VALUE 213 

the manufacture of cloth all grades of ability are required, 
from the highly paid artist and engineer, down to the roust- 
about in the yard. The industries of manufacturing, com- 
merce, and education alike require the cooperation of book- 
keepers, janitors, carpenters, and superintendents. It is easy 
in most cases to pass from any grade of occupation in one 
industry to a corresponding grade in another industry; but 
it is difficult to pass from a lower grade to a higher grade 
in the same or another industry. 

Abstractly considered, that is, wherever free competition Equilibrium 
exists, there is a constant tendency toward a state of equi- ^^^^ggg 
librium; each workman is moving into the industry where 
he earns the highest possible amount, and where he receives 
just what his fellow-men estimate his importance to be, 
judged by the service he performs. Each man's place is de- 
termined by his specific gravity, just as the place of liquids , 
poured into a glass is determined by their density. There , 

is much reason to believe that this condition is approached 
actually in a far greater degree than is thought by those 
who come to the question with preconceived notions of what 
ought to be, or of what they would like to see. This principle 
of the economic wage does not preclude the questioning of 
the justice of existing institutions, but it is a guide in the 
discussion of all practical problems of wages. 

3. The law of wages may be stated thus: in any state of wages 
the labor market the wages of any labor or class of labor is j°J^j 
equal to its marginal contribution— that is, to the value of marginal 
its "products. Each agent in industry, whether it be a plough, 
a horse, or a man, is valued in connection with other agents, 
never apart or isolated. It is not the total service any one 
of them performs that can be got at; all that can be 
got at is the utility attributed to the last unit of supply. 
Their marginal contribution determines their importance. 
Each agent is considered in combination with other things 
at a given moment under existing conditions of supply. 
This statement of the law of wages is broad, and appears 



214 



THE LAW OF WAGES 



[CH. 23 



Wages ex- 
emplify the 
general law 
of value 



to be modified in many ways in practice: by changes in 
industry, by ignorance on the part of the worker, by unequal 
skill in bargaining ; but the law of wages just stated allows 
for these modifications, and is a guide amid the complexity 
of facts, for it gives a place to the influence of trade unions, 
caste, and everything else that affects the labor-supply. The 
law of wages is but the general law of value, working itself 
out amid the special conditions accompanying the gratifica- 
tion of wants by human effort. 



CHAPTER 24 
THE RELATION OF LABOR TO VALUE 

§ I RELATION OF RENT TO WAGES 

1. The law of wages must be considered in connection concrete 
with other far-reachinq influences. One may use the sen- onditionsof 

... industry 

tence, " the marginal productivity of labor determines must be 
wages," without having a true understanding of its mean- st^^^d 

• \.- ■ ■ -, n ■ ■ ■ , , r. 1 with wages 

mg. Memorizing a dennition is only the nrst step toward 

economic reasoning. Till that definition becomes a real 
thing in the student's thought it helps him but little. The 
law of wages is an abstract statement of the logical relation 
of wages to utility; it is not a concrete statement of the 
industrial conditions in which labor works, yet these are 
more nearly in the nature of true causes of value. The 
marginal utility is itself determined by forces and conditions 
outside of labor that are constantly changing. The more 
thorough is the student's knowledge of the actual conditions 
of industry, the more correctly he can apprehend the rela- 
tions of wages to other incomes, and the more wisely he will 
apply the abstract law to practical life. 

2. The marginal productivity of labor is affected by the produc- 
relative abundance and efficiency of natural resources. If **^'ty°* 

II -J I labor and 

land suddenly becomes more abundant through the opening diminishing 
up of new continents, the lower grades of agents are sooner returns of 

' 7 D natural 

or later abandoned. Labor having more of a choice as to agents 
the place where it is to be used, spreads itself over the 
better grades and takes on a greater marginal productivity. 
The marginal unit of labor working on better soil than before 

215 



216 THE RELATION OF LABOR TO VALUE [CH. 24 

produces more, and wages expressed in produce are higher. 
Ground rent, on the other hand, is less under these condi- 
tions. If, however, the land is fixed in area, and population 
increases, no other change taking place, the principle of 
diminishing returns applies. The marginal laborers (the last 
arrivals or the growing generation) being compelled to work 
with less efficient resources on a poorer quality of land, 
produce less than was the rule before, and a smaller product 
therefore is attributed to all the laborers of that grade. 
They get lower wages and more goes as rent to the owners 
of the land. By shifting of occupations this reduction may 
be somewhat moderated and equalized among the workers 
in other industries. In both these cases, wages vary more 
than does the physical amount of the total product. In the 
first case, wages are a larger proportion of a larger product ; 
in the second case, the product is larger (there being more 
laborers) but wages are a smaller proportion of it. 
Theironiaw 3. The Unwarranted assumption that a disproportionate 
of wages increase in population is sure to occur, gave rise to the suh- 
sistence theory, or iron law of wages. This assumption is 
now seen not to correspond with what is occurring in the civ- 
ilized world. A hundred years ago, however, when the poorer 
classes of Europe appeared to be increasing with little re- 
straint, it was not strange that thinkers should look upon 
this increase as inevitable. According to the subsistence 
theory, the question of population was simply a question of 
food ; it was believed that men surely would multiply up to 
the point where they could not further increase their num- 
bers, and starvation wages would be the rule. It was this 
way of looking at things that gave to political enonomy the 
name of the dismal science. When population is limited in 
large measure by volitional means instead of by war, starva- 
tion, and other material means, the problem changes and the 
error in such a theory of wages becomes clear. 

The "standard of living" theory of wages is a refined 
form of the subsistence theory. This theory is that wages 



§1] RELATION OF RENT TO WAGES 217 

must rise to meet the cost of any standard that the laborers Thestan- 
may set, and below which they will refuse to multiply. This ^"^o* 

111 c . ,,11,- .., living, and 

IS probably a fragmentary truth, but is quite inadequate as wages 
a theory. A high standard of living and all the social insti- 
tutions and customs that aid in keeping the population from 
too rapid increase, are factors in determining ultimately the 
marginal productivity of labor and, hence, the height of 
wages. If these restraining influences suddenly were with- 
drawn, a reduction of wages would follow slowly because of 
the diminishing returns of material agents. But the stan- 
dard of living is merely a partial and negative factor. No 
limitation of the number of workers can raise wages above 
their productive contribution and, in the present state of 
industry, a considerable falling off in population might be 
expected to result in a loss of enterprise, of cooperation, 
and of capital. The positive factor in wages is productivity. 

4. An increase of popidation more rapid than that of ifiabor 
the artificial industrial agents would reduce marginal pro- '"creases 
ductivity. Labor makes use of many kinds of agents besides wealth, 
the so-called natural resources. If population is stationary ^^^gesfaii 
while tools are allowed to wear out or if an increasing 
population, while opening up a proportionate supply of land 

for food, fails to accumulate a proportionate stock of other 
tools, the marginal productivity of labor must diminish. 
Labor would be more imperfectly equipped with spades, 
hoes, wagons, horses, cattle, machinery. These artificial 
agents help in getting not only manufactured products, but 
food products. The equipment of labor must keep pace with 
the number of workers or they will be forced to the lower, 
or less effective, uses in the tools. On the other hand, the 
growth of science and invention, and the growth of wealth 
faster than the population, equipping labor as it does with 
more efficient implements, cause the marginal productivity 
of labor to rise, and hence also the wages. 

5. The "wage-fund theory'* was an imperfect percep- 
tion of this truth that wages are influenced hy the efficiency 



218 



THE RELATION OF LABOR TO VALUE 



LCH. 24 



The wage- of the industrial equipment. As the subsistence theory took 
exptSS'^ ^ partial view, looking at agricultural land alone as the 
determinant of wages, so the wage-fund theory looked alone 
at a portion of the capital in the hands of employers which 
was the fund from which wages were paid. The large 
part played in discussion by this doctrine and the strong 
hold it had on thought is somewhat puzzling now; for if one 
begins to doubt its entire truth it is difficult to be quite 
just to its merits or to state it in a form that is plausible. 
The theory was that wages depended on the amount of 
capital that, in some way not clearly seen, was set apart 
by employers for the payment of wages. The capital making 
up the fund out of which wages were supposed to be paid, 
was only a very small part of all capital, even in the narrow 
sense in which that term was then used. It was assumed that 
this wage fund, once set aside, was necessarily paid out to 
laborers, wages being therefore determined by simple divi- 
sion : laborers were the divisor, the wage fund the dividend, 
and the average wage the result. When the theory is thus 
baldly expressed, it appears to begin and end on the surface 
of the facts; and the wage fund appears to be rather the 
arithmetic sum of variously determined payments than, in 
any sense, the cause of wages. 

The abler wage-fund theorists did not fail at times to 
see, though too dimly, as the determining causes behind the 
employers' action, certain other things, such as the material 
facilities, the desires of consumers, the capabilities of the 
workers, and the resulting value of the labor. The element 
of truth which still should be recognized in this theory 
is that the relation of labor to its equipment influences its 
efficiency, and determines the part of the product to be set 
aside for wages. In that sense, wages are related to the 
abstinence of capitalists and to the supply of "capital," 
but capital understood not as a special fund of the em- 
ployers, but, in a broader sense, as labor's entire environ- 
ment of indirect agents. 



The wage- 
fund theory 
a partial 
truth 



§11] RELATION OF TIME-VALUE TO WAGES 219 



§ II. RELATION OF TIME-VALUE TO WAGES 

1. The services of lahor, whetJier for one's self or others, Labor may 

be near or 
far, in time, 



have a more or less immediate relation in time to the gratify- 
ing of wants. While all human efforts to which the term fromgrati 
services is applied have a relation to wants, there is much *''^^°°® 
diversity in their nearness to the gratification for which 
they are destined. The process may be technically round- 
about, to use the language of recent economists. One may 
break a stick from a tree, pick up a stone and drill a hole 
in it, catch an animal, cut thongs, tie the handle to the 
stone, and use it as a weapon to kill other animals for 
food, the first step being taken with the last object in view. 
But a still more essential relation we have seen to be the 
relation in time. Some things, some goods, are used at once, 
some after a long interval ; some are durable, others perish- 
able. Labor produces a song or a glass of lemonade to be 
consumed on the instant; it is employed on bridges, monu- 
ments, railroads, or interoceanic canals lasting for centuries. 
In all these cases the general object sought is the same 
though very different intervals of time must elapse before 
the gratification matures. 

2. As different periods of time must elapse before services au future 
are enjoyed, the expected value of all products but those 1"^^^'=^^°* 
immediately available is discounted in advance. The services discounted 
that afford gratification immediately, and those that afford t"***"^ 
gratification at a later time, are judged and compared at one value 
and the same moment. All economic life centers in the 
present. This difference in the time of services surely can- 
not be ignored. If Robinson Crusoe, at work on his island 
with his limited supply of energy, continues to provide 
for next year's enjoyment, neglecting the present, present 
goods become scarce and their utility rises as compared with 
the future goods the same labor secures. To escape incon- 
venience, and in the extremest case to escape starvation, 



220 



THE RELATION OF LABOR TO VALUE 



ICH. 24 



The em- 
ployer ad- 
justs his 
labor force 
to the 
interest 
rate 



Crusoe would be compelled to restore the equilibrium be- 
tween the wants of the two periods by shifting his labor 
back to the present. So in each little economic group and in 
our complex society there is constant rivalry of present and 
future wants, competing for the limited present supply of 
labor. The present says, " Give me your labor and 
I will give you the fullest enjoyment." The future says, 
" I will give you a greater gratification, but you must wait 
for it." A given labor force thus making possible a wide 
range of choice among present and future services, labor 
is distributed according to the prevailing rate of time-value, 
which, as we have seen, is approximately expressed by the 
rate of interest. If the rate of interest is high, it means that 
the present is urgent and will not easily yield to the future. 
If the rate is low, it implies that the present is comparatively 
well provided for, and that future wants are given more 
consideration. 

3. The employer in hiring labor and producing goods 
lakes account of these time differences. In the preceding 
paragraph has been noted the influence of time differences 
in the simplest problem of economic wages. Interest is like- 
wise taken account of in the bargains between workman 
and employer, by which contract wages are fixed. The 
employer of labor works subject to a prevailing rate of 
interest. If he ignores it he must lose. He should direct a 
given amount of labor to products that mature next year 
only when their expected selling price is greater than that 
of products that can be marketed this year. This difference 
due to time can no more be ignored than can any other 
difference in the cost of products. If the employer keeps 
the future goods to sell later, they will normally increase in 
value as they approach maturity; if he markets the goods 
at once, he normally must pass on to the purchaser the 
benefit of the discount he has made on their future value. 
That is to say, it is not the employer of labor, the purchaser 
of labor as such, who gains by discounting the future value 



UI] RELATION OF TIME-VALUE TO WAGES 221 

of labor; it is the investor of capital (whether employer or 
later purchaser) who secures the rent as it matures. 

4. Hence all wages paid for help on products that are Thedis- 

r emote are based on the present worth, or discounted value, ^^re°vaiue 
of the future gratification to which the labor contributes, ofsemces 

is i]16vi^3.l)l6 

The idea is held in one form or another by all radical socialis- 
tic writers, that the laborer does not get the full value of his 
products. In the sense that is here discussed, he does not. 
He does not get what the product will sell for in the fu- 
ture. He gets the probable future value at its present 
worth, discounted at the prevailing rate. That part of the 
employer's gains corresponding to this discount on labor is 
economic time-value. 

Nor is this discount of future services dependent on a 
political system or on private property or on the wage 
system, as some have assumed. It is a universal truth. It 
is in the nature of wants that present and future should 
differ. A communistic or socialistic state would have to 
take account of this difference, else the whole social economy 
would be irrational and there would be no principle by 
which to apportion in time the productive forces of the com- 
munity. Contracts to pay interest and contracts to pay 
wages might be forbidden and made criminal by formal law, 
but time-value would persist. 

5. Wages and, rent are coordinate species of the value Relations of 
problem; time-value is a different kind of problem, bearing ^^P^' . 
to both the other problems a similar relation. A close ex- time-vaJue 
amination of the problems of rent and wages serves to bring 

out the close parallelism of these two forms of income as 
here defined. Rent is the value of the usufruct of wealth, 
wages are the value of the usufruct of labor. The bearer 
of the use in one case is material goods, in the other is 
human agents. Different in the source of use, they are in 
large measure alike in the form of contract, or nature of 
the caloulation. Together rent and wages comprise the value 
of all currently arising uses; they are the two coordinate 



222 



THE RELATION OF LABOR TO VALUE 



[CH. 24 



species of the genus "value of uses." The two groups of 
uses are closely interrelated in practice, each acting and re- 
acting on the value of the other. 

Time-value is a different genus of the value problem. 
Having to do with time differences, it must be found in con- 
nection with every use that is not immediate, whatever be the 
bearer of that use. Its application to rent is more frequent 
and obvious, as only the uses of material agents are capital- 
ized, that is, sold in perpetuity. Moreover any service of 
labor that is not at once consumed is fixed in material form 
and appears thenceforward as wealth whose uses are yielded 
as rent or as consumption goods. 



Several 
conditions 
of value 



Two phases 
of economic 
production 



§ in. THE RELATION OP IvABOR TO VALUE 

1. Labor is a cause, hut oily one of the causes of value. 
A cause is some one condition which is seen to be neces- 
sary to the existence of a thing, and usually that condition 
which brings the thing about, other things being assumed. 
In what sense ought a cause of value be spoken of? In 
one sense it is in the minds of men— it is their wants; again, 
looked at objectively it is in the nature of the good— it is the 
(piality that fits it to gratify the want. But if both these 
causes are operative, and labor is applied to fit goods better 
to gratify wants, labor appears as the cause of value. Per- 
sonal causes are so much more evident, an explanation 
through personal causation is so much more satisfying in the 
earlier stages of scientific inquiry, that labor long continued 
to be looked upon as the one source of value. This erroneous 
view has never quite ceased to influence economic thought, 
and a great deal of effort has been directed to formulating 
theories of value based upon it. The cruder form of the 
error has now almost disappeared, but in various little rec- 
ognized ways it still persists. 

2. Eco7iomic production is the origin, or genesis, of value 
finding its source either in objective things or in services. 



5111] THE RELATION OF LABOR TO VALUE 223 

The writers of fifty years ago defined economic production 
as the application of labor to the creation of wealth. But as 
there are two factors in production, man and material things, 
so there are two productive sources of value. In some cases 
the origin of value is attributable to man's action; in other 
eases scarce uses arise in objective things without man's ac- 
tion. Broad as is this definition of production, it does not 
include the enjoyment of free goods, as in the case of the 
care-free darky basking in the sun. Anything that, causing 
a feeling of greater importance to attach to a thing, changes 
it from a free good to a scarce good or makes it more scarce, 
is a cause of its value. A large rainfall causing a greater 
crop of grain may be thought of as producing utility. The 
regular surplus of value attributable to the waterfall or 
to the railroad, is the product of the material services of 
wealth. Production through human action is the more obvi- 
ous and is the more usually thought of; the part of material 
agents must be recognized if the fallacies of the labor theory 
of value are to be avoided. 

3. Human activity is directed to sliapi)ig axd. arranging Laborap- 
thiiigs so as to increase their want-gratifying power. Human pHe^to 
and non-human agents are combined in different proportions uimty 
in various products. In one thing more land and machinery 
are used, in another more labor is used. But either of these 
two great classes of agents may touch the vanishing point 
in the production of value. While it is true that man's 
part is the most striking aspect of production, yet there 
may be value without labor. The study of rent puts this 
abstractly, but in a clear light. In actual life, however, a 
part of the value is usually attributable to rent, a part to 
labor. 

But in what sense is even this part attributable? Not in 
the sense that the labor is the original source of value which 
imparts that value to its products. Tlic usufruct of wealth 
is the basis of rent; the need to pay rent is not the cause 
of value in the product. Likewise, product is the basis of 



224 



THE RELATION OF LABOR TO VALUE 



[CH. 24 



Value of 
labor de- 
rived from 



wages, labor is not the origin of value. Labor, like the 
forces and qualities of wealth, is the cause of technical 
changes. These changes, if favorable, cause the goods to take 
on a higher value which is reflected back to the labor. The 
labor itself has not a predetermined, ascertainable value, but 
its products Only a resultant, derived value. An exception to this state- 
ment appears on a superficial view of the value of labor 
hired under the wage contract to make a particular product. 
The labor having a market value because of a large number 
of well-known alternate uses, can be diverted to a particular 
use only on condition of a definite payment. Labor here, as 
viewed by the employer, appears to have an original value; 
products, a derived value. But in the logical view, labor is 
seen to impart technical qualities to the goods; in turn, the 
goods to impart value to the labor. Man hunts throughout 
industry for those things to which his labor can be applied 
usefully. He foresees in them the changes that will increase 
the value. It is only as he has judged rightly that the value 
taken on by the things is reflected back to the labor at- 
tributed to it. 

4. Labor being of many qualities and receiving many 
rates of pay, there is no unit of lahor that can be used as a 
measure of value. The idea of finding in a "unit of labor" 
an objective standard of value to which the value of all 
other things could be reduced has been a very attractive one. 
This fallacious hope animates every one beginning to think 
of the value problem. The thought was so plausibly formu- 
lated by Ricardo that it continued for a long time to be the 
generally accepted doctrine of value. Although most writers 
reject the formal statement of the labor theory of value, 
use is frequently made, even now, of the phrase "unit of 
labor," suggesting the thought that labor is the standard by 
w^hieh the value of all goods may be measured. This unit of 
labor of the text-books may be seen to be either labor arbi- 
trarily assumed to be of uniform quality and quantity, as a 
day of unskilled labor (in that form quite incomparable as 



No unit of 
labor to 
serve as a 
standard of 
value 



Mil] THE RELATION OF LABOR TO VALUE 225 

to amount with other qualities), or a given amount of money 
invested in labor of different grades at its market value. 
It is only by expressing labor in terms of its value that the 
various grades of skilled and unskilled labor can be reduced 
to a homogeneous unit, which is but a unit of money wages. 
This should not deceive us into the belief that in any peculiar 
sense labor can be used as a unit of value. It is equally 
valid and convenient to speak of units of machinery and of 
units of land. In terms of capital a factory site can be 
expressed as a multiple of a potato patch not less perfectly 
than can a sculptor's labor as a multiple of a ditch-digger's. 

Scarcity of things desired is the one objective condition scarcity 
of value. The things that labor can produce and the labor of labor 
to produce them being scarce, labor takes on a value. All 
things at last become comparable in terms of psychic income 
in each individual's judgment, but as yet neither in this 
comparison nor in the market values that are fixed in ex- 
change, has any absolute standard been found by which 
the utility of all goods or the welfare of all men can be 
measured. 



CHAPTER 25 
THE WAGE SYSTEM AND ITS RESULTS 



The wage 

system 

defined 



Never the 
exclusive 
form of 
organization 



§ I. SYSTEMS OF LABOR 

1. The wage system is the organization of industry where- 
in some men, ow7iing and directi7ig capital, buy at their com- 
petitive value the services of men without capital. The wage 
system is a method of organization never found completely 
realized. A community made up entirely of independent 
small farmers, living each on his little patch of ground, does 
not have any essential feature of the wage system. So long 
as they continue to be independent small farmers, owners of 
small capital, self-employing workers, the wage system does 
not exist in complete form. Some men with capital in every 
community are working for wages, while others, as inde- 
pendent producers, are their own employers. Society is not 
sharply divided into two classes, one controlling all the 
working capital, the other quite without resources. The 
wage system may be spoken of as prevailing to-day not as 
the exclusive, but as the typical, or dominant, form, while 
side by side or along with it is found independent produc- 
tion. It is clear that the wages here spoken of are contract 
wages. The wage system implies a money contract between 
employer and employed. The relation or bond between 
them is that of a wage payment. 

The wage system cannot be judged properly apart from 
questions to be later considered, such as private property 
and the enterpriser's part in industry; but some considera- 
tion of the subject properly belongs here. The wage sys- 

226 



§1] SYSTEMS OF LABOR 227 

tern has become of recent years in America the dominant 
form of industry. The theory of wages is applied most 
frequently in the discussion of contract wages, and there 
are certain practical relations between the results of the 
wage system and the theory of wages. 

2. The wage system, historically considered, is seen not workers 
to have displaced a system of independent labor. This ques- fn^^j"'**^ 
tion should be viewed in historical perspective. As far back societies 
as history can be traced, the masses of workers have been 
subordinate. Civilization began with direction, with obedi- 
ence to superiors on the part of the mass of men. Within 

the family, in the rudest tribes, the women and children 
were subject to the will of the stronger, the head of the 
family. Among the Aryan races the family system was 
widened, and the patriarch of the tribe secured personal 
obedience and economic service from all members of the 
community. Chattel slavery, the typical form of industrial 
organization in early tropical civilization, seems to have 
been one of the necessary steps to progress from rude con- 
ditions; students to-day incline to view it as an essential 
stage in the history of the race. But as conditions changed 
with industrial development, chattel slavery became a hin- 
drance to progress, a disadvantage to higher industry. 

3. Serfdom for rural labor and many limitations on the piaceofthe 
ii'orkynan's freedom in the towns, were the prevailinq condi- 'workers m 

' . . the Middle 

tions in medieval Europe. Serfdom was both a political Ages 
and an economic relation. The serf was bound to the soil ; 
the lord could command and control him; but the serf's ob- 
ligations were pretty well defined. He had to give services, 
hut in return for them he got something definite in the form 
of protection and the use of land. Between the lord and the 
serf continued a lifelong contract, which passed by inher- 
itance from father to son, in the case both of the master and 
of the serf. In the towns conditions were better for the 
skilled workmen, but many things bore heavily on the mass 
of the workers shut out from special privileges. There were 



228 



THE WAGE SYSTEM AND ITS RESULTS 



[CH. 25 



The wage 
system not 
the main 
cause of 



strict rules of apprenticeship ; gild regulations forbidding 
the free choice of a trade or a residence ; laws against immi- 
gration; settlement laws making it impossible for poor men 
to remove from one place to another ; arbitrary regulation of 
wages, either by the gilds in the towns or by national councils 
and parliaments, forbidding the workmen to take the com- 
petitive wages that economic conditions forced the employers 
to pay; combination laws forbidding laborers to combine in 
their own interest. It is not an attractive picture, but, as far 
as is possible in a few words, it is a truthful picture of the 
conditions that existed before the coming of the modern 
system. 

4. Many continuing limitations on the freedom of the 
worker are not the results of the wage system or a part of 
it, hut are opposed to its complete workings. The worker's 
presenteviis ignorance is a limitation, preventing the choice of an occupa- 
tion for which he might naturally be fitted. Neglect of chil- 
dren by parents is a limitation, preventing industrial 
training and the development of qualities that would make 
it possible for the child to excel. The faults of human 
nature cannot be attributed to any ' ' system ' ' ; and if they 
are remediable, it is by education and better social oppor- 
tunity. Trade unions often forbid boys to become appren- 
tices, and forbid the choice of a trade except under conditions 
so exacting that to many they are impossible. Such limita- 
tions are made by the privileged few in their own interest, 
but they are annoying and opposed to the interests of the 
many. The typical wage system would be one in which all 
such hindrances were lacking, in which there were no social 
or political limitations on free competition except such as 
would help in educating and training the worker. The wage 
system should be judged by what it is, not by things directly 
opposed to its spirit. 



§11] 



THE WAGE SYSTEM AS IT IS 



229 



§ II. THE WAGE SYSTEM AS IT IS 

1. Under the wage contract the worker gets in a definite 
sum at once the market value of his services. Under the 
wage contract the employer takes the risk as to the future 
selling price of the product. That he is the one best pre- 
pared to assume the risk will be made clearer in the dis- 
cussion of the employer's function. Wage payment, there- 
fore, is a form of insurance to the workingman ; he gets 
something definite instead of taking chances he is ill pre- 
pared to take. Wage payment is a form of credit to the 
laborer whose labor has not yet produced the distant grati- 
fication. The employer advances to the workman the value 
of the future gratification, discounting it at the prevailing 
rate of interest. The darker side of the wage bargain is 
that the "cash nexus," as Carlyle expressed it, is too often 
the only bond between the parties. When the wages are paid, 
the employer considers his obligations discharged. There 
is a lack of fellowship and sympathy in it all. Work should 
be a bond of communion between men, but as it is, the 
laborers in some great factories and their employers live in 
entirely different worlds. The great inequality of their con- 
dition makes mutual understanding difficult. They are 
master and man, "boss" and hireling, not co-workers, each 
with a worthy part in the noble tasks of industry. 

2. The wage-earner gets the competitive value of Iris 
services, securing in most cases nuicli more than a hare 
subsistence. At the present time competition is in a large 
measure active among employed as well as among employ- 
ers. A believer in the subsistence theory of wages must, 
under these conditions, expect wages to fall to the starvation 
level. But according to the law of wages here presented, it is 
to be expected that wages can and will remain indefinitely 
above that level, falling or rising as conditions change. The 
increase in material wealth of itself tends to increase the 



Merits and 
faults of the 
definite 
wage pay- 
ment 



Strength 
and weak- 
ness of the 
worker in 
competition 



230 



THE WAGE SYSTEM AND ITS RESULTS 



[CH. 25 



Wages as 
affecting 
the ambi- 
tion of the 
worker 



wages of the workman. The laborer, though without re- 
sources and even though not contributing to the increase of 
capital by saving, thus shares in the benefit of increasing 
capital. It is true that under some conditions the workman 
is at a disadvantage in making the wage contract; labor 
must be applied from day to day or it is lost, and the laborer 
must work to live. While this does not determine the rate 
of wages in the long run in any occupation nor to any great 
extent except among the lowest grades of labor, it does give 
an advantage for the moment to the employer, and enables 
him to exercise at times a harsh power over the workmen in 
his immediate neighborhood. A single workman is thus 
very often at a disadvantage, but it must not be overlooked 
that in a large degree the competition for good Avorkmen is 
effective between employers in different trades and in distant 
localities. 

3. Increase of efficiency due to the sacrifice of parents 
or to personal exertion, goes to the individiial worker. The 
most essential practical feature in any industrial system 
is the appeal to the ambition of each man. This appeal 
is made where a premium is placed on increasing efficiency, 
by insuring to it a higher return. This result is possible 
and in large measure is attained under the wage system. 
Little less important is the appeal to family affection to 
make possible by its sacrifices each worker's best preparation. 

An offsetting disadvantage appears in the loss to the 
laborer in the decline of his powers. As he gains in wages 
if he increases in efficiency, so he loses if his strength fails 
from accident or in the course of years. This loss falls 
upon him, not, as is sometimes said to have been the case 
under serfdom or slavery, upon his owner (as if that se- 
cured to the slave immunity from suffering). It is true 
that in general under the wage system the worker has no 
guarantee against loss of work or, what is equally impor- 
tant, against sudden changes in industry. He may be, and 
often is, a victim of invention and of changes in machinery 



HI] THE WAGE SYSTEM AS IT IS 231 

or industrial processes, by which the masses of men are the • 
gainers. 

4. Liberty of the worker in his choice of work and out- Large 

side of working liours makes for happiness, character, and ^y^^"'^ 

' ^ I L-L- y ) thewage- 

progress. Opinion is almost a unit as to the truth of this worker 
statement. The present wage system is the freest condition 
for the mass of men that ever has existed. Their religious, 
political, and personal convictions, are for the most part 
inviolate. There is a true but much misused maxim that 
liberty has its dangers. Freedom means freedom to make 
mistakes. Intelligence and strong industrial virtues are re- 
quired to exercise properly a freedom newly acquired. Thus 
it is the lowest class of labor that reaps the smallest advan- 
tage from free conditions, and that suffers most from their 
misuse. 

The main evil in the wage system is certainly not that Limits to 

the liberty of the worker is too great, but that it is too small, ^'^f TT""^^ 
"^ _ . . er'8 liberty 

The sale of labor involves the obeying of orders during 
certain hours specified in the contract. Here again the evil 
is greatest in the lowest grades of work, while the great 
majority of wage-earners are left a large measure of choice 
in the time and manner of their work. Where labor is 
severe and without joy to the worker, it appears to be little 
better than a form of slavery. Contrast the condition of the 
section hand, cursed and beaten by a brutal foreman, with 
that of the wage-earner in the locomotive-cab, self-respecting, 
self -directing, and trusted with the safety of property and 
lives. The wage system is manifold, it is adaptable. If it 
holds a portion of the laborers with a harsh hand, it gives to 
all a wide measure of opportunity, and to most a great degree 
of independence in their lives. A hasty resort to indiscrim- 
inating analogy, as in calling wage-work "slavery," does 
not further truth or social justice. 



232 



THE WAGE SYSTEM AND ITS RESULTS 



[CH, 25 



The rise of 

money 

wages 



Changes in 
real wages 



§ III. PROGRESS OF THE MASSES UNDER THE WAGE SYSTEM 

1. The nineteenth century was a period of great progress 
for the masses in America, England, and throughout Europe. 
There are differences of opinion as to the extent of this 
progress, the way in which it is to be measured, and the 
degree to which it is an occasion for congratulation. There 
is no longer any dispute as to the actual fact that it has 
taken place. Many lines of evidence converge to confirm 
this one conclusion. The average money wages in the United 
States may be represented in 1840 by 87.7, in 1860 by 100, 
and in 1891 by 161.2. This was the high mark for a time 
and a decline followed. Again wages rose from 1897 on, 
and in 1899 had reached 163.2. They have continued to rise 
since and in 1903 attained the highest point in the history 
of our country and therefore in the history of the world. 
Another temporary decline undoubtedly will occur when in- 
dustrial conditions become less prosperous. 

Real wages, also, the power to purchase goods with labor, 
are greater than ever before so far as this can be measured 
in the price of leading commodities. The offsetting loss of 
the free health-giving pleasures of country life cannot 
easily be expressed. In England likewise the rise in money 
wages has been great. In 1860 it is represented by 100, in 
1870 by 113, in 1880 by 125, in 1891 by 140, in the intervals 
some decline occurring. For a century in all civilized lands 
wages have moved in an ever-rising series of waves. The 
purchasing power of wages in England increased ninety 
per cent, in the thirty years between 1860 and 1891. 
Throughout Europe the same general change is seen, going 
always hand in hand with new industrial methods and the 
displacing of the old agricultural system by the wage sys- 
tem. As the hours of labor have at the same time been 
shortened, the workers have gained doubly. 

2. This progress is mainly due to the opening up of rich 



.^ IIIJ 



PROGRESS UNDER THE WAGE SYSTEM 



233 



■natural resources arid to the development of industrial pro- 
cesses. Recognized in some measure by every one, this prog- 
ress is attributed by different observers to different causes : 
in America, by many to the protective tariff; in England, 
by many to the freer trade introduced about 1840 ; through- 
out the continent of Europe, to the spread of constitutional 
government and free institutions ; by trade-unions every- 
where, to the organization of labor. There is, doubtless, under 
certain conditions, some portion of truth in each of these 
claims. But, either separately or altogether, they fall short 
of a broad, reasonable, and sufficient explanation. The two- 
fold proposition just presented, the justification for which 
has been given in preceding chapters, points to a general 
and adequate cause. 

Seventy-five years ago it was thought that, with the in- 
crease of machinery, of factories, of the concentrated con- 
trol of wealth, and especially with the wage system, there 
must go a steady depression in the welfare of the working- 
man. This idea was connected with the iron law of wages. 
It was believed by some that, whatever the causes of advan- 
cing social income might be, the wage system would rob the 
wage-earners of all share in progress. In view of the facts, 
if it cannot now be asserted positively that the wage system 
is the cause of all the gain, it can be asserted negatively that 
it is not inconsistent with great progress on the part of the 
laboring classes. It might be possible to go further and to 
maintain that the organization of industry, under the wage 
system and competitive conditions, by its encouragement 
of enterprise, energy, and economy, has been an indispen- 
sable condition in the industrial progress which has in turn 
made possible the rising wages of labor. 

3. The increased proportion of workers in the higher 
occupations means a further rise in the average condition 
of the masses. A smaller proportion of workers is now en- 
gaged in the low-paid industries than fifty years ago, and a 
correspondingly larger proportion is in the better, or highly 



Need of a 
broad ex- 
planation of 
rising 
wages 



The gloomy 
view as to 
the wage 
system was 
mistaken 



More work- 
ers now in 
better-paid 
callings 



234 



THE WAGE SYSTEM AND ITS RESULTS 



[CH. 25 



The masses 
gain by 
general 
social 
advance 



Better 
social con- 
ditions must 
grow out of 
the wage 
system 



paid, industries. Decade by decade the proportion shifts 
toward the upper part of the scale. Both in America and 
in England (doubtless also in other countries) more men 
are now engaged in the higher professions and skilled oc- 
cupations, a smaller proportion in the lower occupations. 
This would raise the average of wages even if the wages of 
particular occupations had not risen. 

4. The diffused advantages of progress mean relatively 
more to the masses than to the rich. In the olden days the 
poor man was bound to the spot where he lived, the rich man 
had his carriage ; to-day poor and rich ride side by side 
in the trolley car. The introduction of these cheap methods 
of enjoyment means relatively more to the poor. Better 
medical care, better sanitation, more abundant food, cloth- 
ing, comfort, free schools, and libraries have all a part in 
this movement. The enormous possibilities in these lines are 
just beginning to be realized. The achievements of the last 
twenty years read like a story from fairy-land. It tells the 
leveling up of the conditions enjoyed by the common man. 

5. Any sound method of improving social conditions must 
grow out of experience, not break with it. Even if things 
were on the downward instead of the upward road there 
would be no excuse for wild speculation. The only rational 
way is to find what is good in what is, and build upon it. 
There can be no excuse for suggesting a method from 
imagination. Projects of social change must be tried by 
successful experiment, and gradually fitted to present needs. 
It is in this way that the higher forms of life have devel- 
oped ; it is in this way that social and political institutions 
have come into being. Things that work successfully first 
in a small way are worthy of trial on a larger scale. The 
wage system is a favorite object of attack for radical social 
reformers. It has many unlovely features and there are 
many individual cases of hardship. It may well be asked, 
What method shall be pursued to reform it? Its retention, 
however, is not inconsistent with very great changes in the 



§111] PROGRESS UNDER THE WAGE SYSTEM 235 

present political and economic arrangements. The imper- 
sonal economic forces are working for improvement; but 
further, there is a growth of sentiment, an increase in sym- 
pathy, a feeling among men that the "cash nexus" is not the improve- 
only bond that should unite different classes, and this ™^°tinthe 

*' ' wage sys- 

sjTnpathy is becoming an economic force, softening and tem 
improving many of the most unlovely features of the modern 
wage system. 



CHAPTER 26 
MACHINERY AND LABOR 

§ I. EXTENT OF THE USE OF MACHINERY 

Tools, 1. A machine is a mechanical device hy which power is 

^d'^power ^ppl^ed in an automatically repeated manner, to change the 
place or form of tilings. It is not easy, perhaps not im- 
portant, to distinguish the machine from the tool in every 
case. Tools are portions of matter, such as bone, wood, iron, 
which man guides and directs in applying his energy to 
things. A machine may be used by the foot, but the hand is 
the great tool-using member. In many cases there is a clearly 
marked distinction between tool and machine. A simple, 
single piece that can be taken into the hand, as a spade, a 
hammer, a knife, is a tool; a combination of wheels, levers, 
pulleys, etc., is a machine. The simplest machine is but a 
slight adaptation of the tool, by which power may be applied 
in an automatically repeated manner. The drag develops 
into the cart, a simple machine. The spinning-stick, a tool 
used in ancient times, developed into the Saxon spinning- 
wheel of the sixteenth century, the form used when America 
was colonized. The use of power derived from nature, as 
that of wind and water and steam, while not the essential 
mark of machines, is the most characteristic feature of their 
modern development. Hand-machines, such as the hand- 
press and the typewriter, have had important industrial re- 
sults, but it is the use of power leading to the concentration 
of industry and the ownership of machinery by the employ- 
ers that has the greatest significance in the modern economic 
problem. 

236 



§1] EXTENT OF THE USE OF MACHINERY 237 

2. Machinery of many sorts has long been used, hut the Machinery 
''age of machinery" begins ivith the eighteenth century. anTn^us-" 
Inventions, new machines, and new processes, though not trial revoiu- 
f requent, were not unknown in the Middle Ages ; but no one 

class of machines took possession of a whole field of industry 
and gave rise to a great economic problem by the displacing 
of labor. The great industrial changes in the Middle Ages 
generally grew out of political changes, or of changes of 
routes of trade w^hereby large industries were disturbed, or of 
changes in the use of land through new methods and the 
bringing into use of land in other places. The industrial 
changes in England at the end of the eighteenth century 
on the contrary were due mainly to great mechanical 
inventions. The development of the textile machines 
for cotton and wool spinning and weaving mark the begin- 
ning of the movement. Here for the first time were inven- 
tions in such numbers, of such a nature, and under such 
conditions, that they were rapidly and widely applied, af- 
fecting the lives of a great number of workers. The steam- 
engine at the same time opened up the long line of mechan- 
ical inventions by which wood and iron are shaped and 
wrought, and the iron industry underwent notable develop- 
ments. Since that time, have taken place in all Western 
countries that rapid expansion in the use of machines and 
those notable changes in industrial organization which dis- 
tinguish our era from all others. 

3. Machinery is a-ppUcable in very different degrees to increased 
the different processes and industries. Machinery can save "^^° ^"^^"^ 
much labor in some directions, little or none in others. It is 
especially adapted to the application of power. In the 
United States, in 1870, in manufactures alone, two and one 

third million horse-power were used; in 1900, eleven and one 
third million, the increase being five-fold. It is said that in 
the world, in 1870, three and one half million horse-power 
was furnished by stationary engines, ten millions by locomo- 
tives. Probably to-day the total is four-fold as great. 



238 



MACHINERY AND LABOR 



[CH. 26 



Machines 
can best be 
used in 
manufac- 
tures 



Not to 80 
great an ex- 
tent in 
agriculture 



Machinery is applicable with especial advantage to indus- 
tries that change the form of materials easily transported 
and widely used. There must be a large output to justify 
the use of machinery. In 1840 a man's work in spinning 
cotton was three hundred and twenty times as effective as in 
1769, in 1855 it was seven hundred times; and though the 
rate of improvement is diminishing, to-day the productivity 
of such labor is still greater. Similar examples are found in 
the manufacture of shoes, and in all varieties of wood- and 
iron-work. Machinery is most applicable where there is a 
compact plant ; not so easily where the power has to be dis- 
tributed over a wide area, unless a special track can be pro- 
vided. 

Machinery, therefore, has affected manufactures much 
more immediately and greatly than it has agriculture. It 
has not as yet, for example, been found practicable to apply 
steam to ploughing to any great extent. As the profitable 
use of most farm machinery requires a level surface and a 
large area given to a single crop, it cannot be used as well 
east of the Alleghany Mountains as in the Mississippi Valley, 
and it is still uneconomical in large portions of the civilized 
world. Despite this difficulty the methods of the farmer of 
to-day contrast strongly with those of one hundred or fifty 
years ago. Planters and seeders, reapers, harvesters, corn- 
shellers, hay-loaders, automatic unloading-forks, elevators, 
water-power-, steam-, and gasoline-engines allow great econ- 
omies. The labor needed to produce food for one hundred 
people is a fraction of what it was one hundred years ago. 
In many other industries machines are usable only in a 
slight measure, indirectly, or not at all. They are of the 
least assistance in the personal services, and in the work of 
the thinker, the teacher, the speaker, and the artist. 



§11] EFFECT OF MACHINERY ON WAGES 239 



§ II. EFFECT OF MACHINERY ON THE WELFARE AND WAGES OP 

THE MASSES 

1, The immediate effect of improved machinery, if sud- kvU of 



sud- 



de7ily introduced, is almost always to throw some men out ^«"""tro- 

"^ . duction of 

of employment. Any sudden change in industry injures men machinery 
who have become adapted to the work that is affected. A 
well-mastered trade, a wage-earning though intangible posses- 
sion, may be made suddenly valueless. Men cannot quickly 
change their methods of working or their place of work. 
This is as true of change brought about by new trade routes 
or by scientific discoveries (where machinery does not enter 
in) as in the case of labor-saving machines. If machines 
displace labor rapidly, men who cannot adjust themselves 
to the new conditions suffer, and there are always some who 
cannot adjust themselves, always some who suffer. It is 
rarely possible for a man past middle life to shift over into 
a new trade where his efficiency will be as great and his pay 
as high as in the old. New methods of puddling iron sent 
many old men into the poorhouses of Pennsylvania only a 
few years ago. Even where the total employment increases, 
the individual sometimes suffers. The increased demand 
resulting from the cheapening of a product may call for 
more workers than were employed before the new machinery 
came in, and yet some of the former workmen may be thrown 
out of employment. The introduction of the linotype is said 
to have displaced a large number of hand type-setters, but to 
have increased greatly the amount of printing. As the 
machines are expensive and cannot be worked properly by 
men not highly expert, men past thirty-five years of age 
have not been allowed to learn their use. 

The least efficient men in any trade always suffer most. Loss fails on 
The change crushes hardest the man at the margin of em- g^^jg^^ 
ployment. The more skilled workman can hasten his pace workers 
and still earn a living wage in competition with a machine. 



240 



MACHINERY AND LABOR 



[CH. 26 



Error of the 
' ' lump of 
labor ' ' 
notion 



Effect of 
machinery 
varies in 
different 
industries 



while the less skilled can but drop out entirely, innocent 
victims of an economic change, sacrifices to the cause of 
industrial progress. Happily such pathetic incidents are 
relatively not numerous. Most machinery is introduced in 
commercial centers, and gradually spreads to other factories 
in such a way that most men can adapt themselves to the 
change. The effect of machinery must not be judged by the 
extreme cases. It was found that there were more hand- 
looms in use in England in 1850 than fifty years before, 
though in the meantime power-looms had displaced the hand- 
looms in all the great factories. 

2. After time for adjustment, the total sum of employ- 
ment is as great as hefore, hut the lahor is differently dis- 
trihuted. The " lump of labor " idea, as it is called, is 
widely held, especially among workingmen. The notion is 
that there is exactly so much labor predetermined to be done ; 
therefore, if machines are introduced, there is that much less 
for men to do. The logical conclusion easily drawn is that 
every machine reduces wages. Few, however, would go on 
to the further conclusion that in the aggregate the existing 
machinery, like an enormous vampire, is sucking the life- 
blood of the working-people,— though traces of such a notion 
frequently appear. 

If extreme examples are taken, it may be made to appear 
either that an increase or that a decrease of employment 
results from machinery. Industries grade off from those 
that are capable of developing a greater and greater demand, 
to those at the other extreme that are capable of a very 
slight increase, as a result of a lowering of the price. There 
seems to be practically no limit to the consumption of textiles, 
provided their price falls; the demand for dress alone is 
indefinitely expansible. Queen Elizabeth, who had a differ- 
ent dress for every day in the year, has many potential 
imitators. There is a constant increase relatively, as well as 
absolutely, in the number employed in transportation, as 
each census shows; there are more railroad men relatively 



ill] EFFECT OF MACHINERY ON WAGES 241 

than there were stage-drivers and teamsters before the day 
of railroads. The number of people now engaged in printing 
books and papers is larger by far than in the daj's when all 
the books of the world were written by the old monks in their 
cloisters. The proportion of workers in agriculture, on the 
other hand, is less than it formerly was. In part this is a 
change in appearance only, for the farmer once made a 
large part of his tools which are now made by workers 
employed in manufactures, yet who in a very real way are 
aiding in agriculture. In part the change is, however, the 
effect of the use of machinery and other improvements in 
agricultural processes. The amount of raw-food products 
i-equired for each hundred persons is quite inelastic. As it 
becomes possible to expend more for food, the change is made 
in quality, variety, flavor, rather than in quantity. The 
greater part of the saving in the cost of food is, however, 
expended in other products, and the labor saved in agricul- 
ture finds employment in supplying these rising wants. In 
other cases also, new industries are made possible as ma- 
chines liberate energy from the production of the more 
necessary goods. At each census it is necessary to change 
the schedule of occupations, because men have adopted call- 
ings unknown before. 

3. In some cases the introduction of new machines in- Abnormal 
^lUres particular ivorkmen. The only reason for the use of ne^^°aciii! 
machinery is to improve the quality or to lower the price of neiyin 
l)roducts. If the workers can do nothing but blindly pursue ^ 
the same tasks, it is to be expected that the wages of hand- 
labor will fall in a particular trade into which machinery is 
suddenly introduced. When, as sometimes happens, em- 
j)loyers introduce machines for the immediate purpose of 
breaking a strike, the workmen are convinced that machinery 
is the enemy of labor. 

Because the extensive introduction of machinery in Eng- 
land was at first accompanied by the unhappy result of a 
lengthening of the hours of labor in factories, this result 

16 



242 



MACHINERY AND LABOR 



[CH. 26 



Higher 
wages logi- 
cally result 
from the use 
of machi- 
nery 



Some grades 
gain more 
than others 



was deemed to be necessary in all other cases. It was in fact 
quite abnormal, and has not been seen elsewhere. The own- 
ers of factories wished to keep their machines employed as 
many hours as possible; the laboring classes of England, 
being at the same time demoralized and depressed by indus- 
trial and social influences that had no logical connection with 
machinery, had no power to resist this movement. In all 
other countries of Europe and in America, where the in- 
troduction of machinery has been more gradual and normal, 
it has been followed immediately by a shortening of working 
hours, as eventually it was in England also. 

4. Indeed, the economic effect of improved appliances is 
logically and inevitahly to raise ivages. It has been shown 
above, in the discussion of wages, that if the efficiency of 
machines increases faster than does the number of workers 
who use them, the marginal application of labor stops at the 
higher uses or services of agents and is not forced to the 
lower. The more perfect the economic environment, the 
higher the incomes even of those who own no part of the 
machinery. A part of this benefit may appear in the form 
of higher money wages received, a part in the form of the 
lower price of things bought. Real wages are the essential 
thing, and as a consumer the laborer shares with every other 
member of society in the benefits of improved machinery. 
The benefits resulting from greater abundance are diffused, 
and as goods are brought from the high, or scarcity, end of 
the scale of value down toward the level of free goods, every- 
body gains by the abundance and cheapness. 

The general, or average, gain is not to be judged by com- 
paring the conditions of the lowest grade of society with those 
of fifty years ago, for while that grade may have been bet- 
tered only a little, it has been possible for large numbers to 
rise to higher grades because of the use of machinery. The 
physical tasks are to-day much lighter than ever before, and 
a larger proportion of society is engaged in industries that 
require skill and thought rather than physical labor. That 



§11] EFFECT OF MACHINERY ON WAGES 243 

portion of the work is being more and more shifted upon 
machines. It is important, though, to distinguish between 
classes of workers in judging of the benefits and evils of 
machines. A machine is "an iron man," it has been said, 
and comes into competition with other men to lower their 
wages by outworking and underbidding them. But this iron 
man can do only automatic tasks; it is not capable of exer- 
cising judgment. Every intelligent laborer who can adjust, 
adapt, fit himself for more intelligent action will rise above 
the machine and profit by its presence. But the crude 
physical labor which can compete only on the plane of 
automatic machines, must find its field of employment more 
and more hedged in. If the wages of unskilled labor are not 
• lepressed, it is because of the enterprise. of others who rise 
to more skilled employments and thus reduce the competitors 
i/f the lowest rank. 

5. The early effects of the factory system on the health. The growth 
intelligence, and morals of the workers often have been had; °^ ketones 
hut not necessarily the ahiding effects. Some kinds of ma- 
chines can be more profitably used when they are grouped in 
great factories, and, where this is common, it is spoken of as 
Ihe factory system. In the ideal modern factory (realized in 
few cases) each smaller machine is a part of a larger organi- 
zation of machinery, so perfect that the material goes in at 
(me end of the building and out at the other without the 
loss of a single motion. Factories compel great numbers of 
laborers to live near each other and to work together. The 
sudden crowding together of people into new social relations 
is usually bad for morals. Men are moral under the eyes 
(.f their neighbors, acquaintances, and families; habits be- 
come adjusted to right standards, and the temptations in new 
conditions are always great. Until of late, engineering 
science has not been able to deal with the problems that 
arise where population is densely crowded, and the early 
factories with their surroundings were most unsanitary. 
Under the degrading conditions that resulted in some places, 



244 MACHINERY AND LABOR [CH. 26 

especially in England, the effect of machinery on the intelli- 
gence of the workers was bad. Whether this is its natural 
result is debatable, but the factory worker in general does 
not appear to be less intelligent than the agricultural worker. 
The alertness of the city dweller is due doubtless to social con- 
tact more than to the immediate work he does. This work 
may or may not be less thought-awakening than work with 
simple tools. There is a general improvement along all the 
lines of intelligence, morals, and health. The conditions in 
the cities as regards health and morals are approaching those 
of agricultural communities. While many factory districts 
are forlorn, there may be seen around many factories more 
happy conditions, better buildings, better sanitation, in- 
creased leisure for workers, workmen's clubs, educational 
agencies, and many other evidences of civic and social 
progress. 
Problems of 6. The great social consequences flotving from the con- 
largein- ceutration of industnj and wealth are the most serious proh- 

dustry i -j i 

lems in the relation of machinery to labor. The ownership 
of tools was widely diffused in medieval times. It is not yet 
evident how many can own a share in great factories, but 
the control drifts into tew hands. It is not yet clear what 
social effects great corporations wall have on our democratic 
institutions. Many problems of large industry remain to be 
solved in the near future. The question in the old form, as 
to the effect of machinery on labor, is no longer open. It 
has been clearly answered by experience and explained 
by theory: the economic effect of machinery is to lift the 
productiveness and efficiency of the average man. The 
benefits are unequally distributed, but nearly all share in 
them to some degree. The question which the future will 
have to answer is, What will be the social and political effects 
of the great fortunes that have been made possible by the 
enormous development of machinery? 



CHAPTER 27 
TRADE-UNIONS 

§ I. THE OBJECTS OF TRADE-UNIONS 

1. A trade-union is an association of wage-workers for Definition 
purposes of mutual information, mutual help, and for the ^^P"n>oses 
raising of wages. The term trade-union is used in a general unions 
sense both of combinations of workers in the same trade, and 
of men in different trades, though usually the latter are 
called lah or -unions. The " Knights of Labor " is a good 
example of the labor-union, the "American Federation of 
Labor " of a combination of trade-unions. The Knights of 
Labor is composed of local branches to which workers of 
every class except lawyers and saloon-keepers are admitted. 
The Federation of Labor, however, is composed of chapters, 
or lodges, that are homogeneous, all the men of each lodge 
being in the same trade. 

The definition given is broad enough to include the various 
degrees of help given and the various methods adopted by 
trade-unions to accomplish their objects. Trade-unions are 
mutual-benefit associations : insurance against accident, 
sickness, death, or lack of employment, forms an important 
part, and in some cases almost the whole of their work. 
All unions in a measure serve their members as empkiy- 
ment bureaus, while in some unions this is a most important 
feature. Through trade-papers, correspondence, and per- 
sonal meetings, information is exchanged regarding trade 
conditions, and great mutual service is thus rendered. But 
a great deal of the help given is in the more impersonal eco- 

245 



246 



TRADE-UNIONS 



[CH. 27 



Lack of per- 
sonal touch 
between 
employers 
and work- 
men 



Lack of 
personal 
acquaint- 
ance among 
workers 



nomic ways : help to get from the employers better wages, to 
secure shorter hours, to improve in various ways the condi- 
tions of employment. 

2. The organization of workers has resulted from the 
separation of the economic and personal interests of em- 
ployers and u'orkmen. The control of industry has become 
more concentrated during the age of machinery, and this has 
reduced the feeling of economic unity among the different 
ranks of industry. There is now to the average workman 
no possibility of becoming a master, an employer. The 
largeness of industry forbids, moreover, the meeting and 
pei'sonal acquaintance of employer and workman wdiich were 
before possible. Misunderstandings grow when men cannot 
talk over their differences. The social chasm has widened 
between the workmen and the responsible director of in- 
dustry. As a result of these changes, the attitude of the 
employer very often has become that of the buyer of labor 
as a mere ware. He has with the mass of his employees no 
personal relations whatever, Under these conditions, when 
the employer feels the presence of competition, he is more 
likely to force the lowest wage that is possible. It is not 
unusual for the immediate direction of factories to be in- 
trusted to paid managers, who are responsible to the stock- 
holders and whose work is judged only by the dividends they 
succeed in earning. Many examples might be found where 
the managers or the resident owners have wished to pur- 
sue a more liberal policy than the absentee shareholders 
-would permit. 

3. The need of organization of labor has grown with the 
growth of factories and with the loss of personal touch 
among the workers. This is another aspect of the point just 
mentioned. The smaller the number of employers, the easier 
is it by an understanding to suppress competition on their 
side. If there is only one factory of a kind in a town or 
city, the employer is able to drive a harder bargain with the 
worker. Especially in times of industrial depression is a 



§1] THE OBJECTS OF TEADE-UNIONS 247 

change of employment difficult for the laborer; it involves 
much risk, and loss of time and money in moving. In the 
long run competition must be felt even in such cases. The 
unfair employer will find his workmen drifting away, his 
force reduced in number and quality, and his evil reputation 
going abroad among workmen. But there is a great deal of 
friction in this adjustment and the loss falls largely upon 
the workman. In a large industry, especially, the workers 
have no personal acquaintance with each other, nothing to 
give them a sense of unity and power. In the old-fashioned 
shop, with its close association and its interchange of views, ■ 
could grow up a strong public opinion ; but in the wilderness 
of a modern factory the worker may be unknown in name 
and character to the man who touches elbows with him. 
Moreover, in America differeftces in nationality and in 
speech among immigrant workers is often an effective factor 
in preventing the assertion of their interests. There is an 
analogy (though it is only an analogy) between these condi- 
tions and the political conditions that have led pure democ- 
racies to give way to representative governments. So long 
as a community is small and men know each other personally, 
there may be popular government, but when the number 
becomes larger the only way in which public opinion can be 
concentrated and made effective is by delegating the func- 
tions of government to representatives. 

4. The main objects of labor-unions to-day are to im- Mainob- 
prove conditions in their working places, to maintain or in- ^.^^^g. 
crease wages, and to shorten working hours. Better condi- unions 
tions of safety and sanitation in their work were not the first 
thought of the unions. The workers, as a result of habit and 
ignorance, were strangely unconcerned about this matter. 
Reforms in this direction at the outset had to come largely 
from sympathetic observers. But since better ideals have 
been developed, organized laborers strive to improve the san- 
itary, moral, and other conditions in the places of work. 
Their main object, however, was for a long time to raise 



248 



TRADE-UNIONS 



[CH. 27 



wages, or to resist any decrease. Shorter hours have been a 
prime object of recent years, and almost coordinate with that 
of higher wages. The eight-hour movement has declined 
somewhat of late, but a few years ago it seemed possible that 
the eight-hour day would become the rule. This aim has never 
been lost sight of, however, and now and then another step 
is taken toward it. Labor leaders have repeatedly asserted 
in recent years, when the two demands have been made 
together, that shorter hours were more desirable than in- 
creased wages. 



Organized 
labor seeks 
to prevent 
competition 
among 
workers 



§ II. THE METHODS OF TRADE-UNIONS 

1. The union's first aim is to get control of all the labor 
force in the market, and to minimize competition among 
workers. Every labor federation aims to extend its control 
to every branch of its trade. A sense of wrong is one of the 
strongest forces to bring the workers into the organization. 
The appeal to a common interest is effective in times of great 
grievance, as it was effective in the dangerous times of the 
American Revolution, though failing during the Confedera- 
tion. The unwilling are first persuaded, then coerced by 
threats, by petty persecutions, by the most cruel of all peace- 
ful weapons, social ostracism, and finally by personal vio- 
lence. The " public opinion " and class feeling fostered 
among workers by their organization are analogous to the 
sense of patriotism and loyalty in the country at large, and 
at times displace it, as is seen in the opposition to the militia 
and to the maintenance of public order at times of strikes. 
The individual who declines to enter the union is denounced 
as a traitor and made to feel the scorn of his associates. 
When all these measures fail, pressure is brought to bear 
upon the employer to get him to force the unwilling workers 
into the union. 

2. Its next aim is to use collective in the place of indi- 
vidual bargaining, to force as much as the competitive wage. 



MI] THE METHODS OF TRADE-UNIONS 249 

and more if possible. The term collective bargaining has The union 
been much used to describe bargaining between a group of ggcure^the 
labor leaders, the delegated representatives of the working- fuiicom- 
men, and a group of employers or directors. It is sometimes ^^^^ 
claimed that all the trade-union seeks is to put the workman 
on an equality with the employer in bargaining, enabling 
him to get all he would if competition were free on both 
sides. It is said that organized labor simply prevents the 
employer from following the maxim of Napoleon to "divide 
and conquer," from meeting his employees one by one and 
forcing his own terms upon them. But the most effective 
argument in organizing the trade-union is that it forces a 
higher wage, more than the market would warrant. It is 
sometimes assumed by labor leaders that competitive wages 
would be very low, almost starvation wages, and anything 
above that level is credited to the work of the union; while 
in other cases where the wages are already large, the purpose 
frankly avowed is to limit the labor supply in the particular 
trade and to force a monopoly wage by any means possible. And as 
One's opinion of trade-unions is likely to differ according as "g^pJsS^JJ 
they work in one or the other of these ways. The impartial 
onlooker sympathizes with the efforts of the trade-unions 
in so far as they serve merely to put the workers on an 
equality with the employers in bargaining. The public 
wants to see " fair play," and up to a certain point the 
union is merely a device to get fair play. But if the union is 
a device to defeat competition, to force artificially high wages, 
it will be judged differently. The public readily sees that if 
the unions force more than a fair and open market affords, 
it is rarely at the expense of the employer; that in the long 
run it is at the expense of the purchasing public itself, in- 
cluding the unprivileged workmen shut out from the monop- 
oly of labor. 

3. In order to accomplish their ends, the trade-unions The issue of 

• " till* plo*iP(l 

seek to control their employers' husmess %n various ways, g^gp^g the 
They demand, first, that no non-union men shall be employed open shop 



250 



TRADE-UNIONS 



[CH. 27 



Other 

limitations 
put upon in- 
dustry by 
unions 



even at union wages; they demand that the employer shall 
help them to force his employees into the unions. In this 
very usual demand for the "closed shop" or "union shop" 
the public can see very little justice. On this point, nearly 
always, unions forfeit in a strike the sympathy of the 
public; yet the unions assert that it is almost absolutely 
necessary to gain this point in order to carry out their 
objects. If a union and a non-union man work side by side 
there are many ways in which the employer may make the 
union man suffer. If business slackens, it is likely to be the 
union man that is discharged; if any preference is given, it 
is to the non-union man.- Certainly all will agree that if the 
unions are to get the strength to enforce all their demands 
it is essential that they make good this claim which leaves 
the employer almost helpless. Yet it certainly is not essen- 
tial to the accomplishing of valuable services for the mem- 
bers of the union. The educational and mutual-benefit fea- 
tures are attained without this means ; and much experience 
shows that, if their cause is strong, the organized men 
can carry with them a large proportion of the workers and 
the sympathy of the public in a contest for higher wages. It 
never has seemed to any considerable portion of the public 
any more desirable that organized labor through its officers 
should be able to dictate to employees, than that employers 
should crush the workmen. It is by just this assumption that 
union advocates beg the question of the " union shop." 

Further, the unions direct and control the employment of 
labor, often limit the number of apprentices in a trade, and 
assume to d(Jtermine who shall enjoy the privilege of learn- 
ing it. They limit the output, fix the maximum amount, and 
forbid the use of labor-saving machinery. Whenever the 
unions are charged with these acts, labor leaders either deny 
the facts or avoid giving a direct answer, but there is no 
doubt that the charge is true in many ways and in many 
cases. The requirement that each special kind of work 
shall be controlled by a special trade, and disputes between 



and the 
boycott 



iiil] • THE METHODS OP TRADE-UNIONS 251 

rival trades, for which their jealousies are responsible, give 
rise to great annoyance, expense, and loss to employers and 
to the entire public. 

4. The strike is a threat and a mode of attack to enforce Thestrik§ 
the demands of the union. To most newly organized la- 
borers the union appeals mainly as an instrument for strik- 
ing, for threatening the employer or for making him suffer. 
AVhen a new union is formed, it is nearly always dedicated 
by a strike, which is the simultaneous stopping of work by a 
number of workers. A strike is intended to force the em- 
ployer to grant the wages and conditions demanded. Its 
effectiveness lies in the injury which it occasions or threatens 
in the stopping of machinery, the ruin of material, the loss 
of custom, and the failure to complete contracts undertaken. 
Its success being dependent on the inability of the employer 
to fill the places of the strikers, their energies are bent on 
persuading or coercing other workers from taking employ- 
ment. There are many ways of coercing workers without 
personal violence. Public opinion does much, and probably 
the severest of all coercive measures is the social ostracism 
of the worker. What may be called the endless-chain boy- 
cott is an excommunication, without measure or limit, of the 
non-union worker and of every one in any way befriending 
him or the employer. So far as in their power lies, the 
enraged strikers dissolve the very bonds of society, brother 
easts off' brother, and mother disowns son. The unhappy con- 
ditions in the coal regions in 1902 rivaled the tragedies of 
civil war. A reasonable use of the boycott, refusal to main- 
tain social relations with the person who offends one, is 
doubtless a part of personal liberty; but the boycott, as 
experience shows, has moral limits, and it should have strict 
legal limits. Its use beyond the moderate limit of the first 
degree of personal relations is anti-social to the degree of 
criminality, whether it be used as the weapon of organized 
workers or of organized wealth. 

When peaceable means fail, often there is a recourse to 



252 



TRADE-UNIONS 



[CH. 27 



Violence in 
strikes is 
mob law 



Coetliness 
of strikes 



violence both against the employer and his property and 
against the non-union men. The evils of violence in strikes 
often are tardily recognized by the public, whose sympathy 
up to a certain point is with the striker as "the under dog." 
It is slow to realize that strike violence is mob-law. When- 
ever men of one group assume the right to coerce forcibly and 
to wreak their hatred against one of their fellow-workers, it 
is a blow at political liberty. No free society can safely go 
the first step in permitting one group of men to usurp control 
over others in this way. 

5. The great losses caused hy strikes are the penalty of 
an unsolved industrial prohlem. The losses to workers in 
wages, to employers and to investors in income and property, 
and to the public in interruption of business, aggregate an 
enormous sum. It is, however, impossible to estimate it at 
all exactly, as the losses are in many cases indirect and 
intangible. The strikers are concerned not with the balance 
of total losses and total gains to society as a whole, but 
with the net gain that in the long run accrues to them. It 
is true that there are indirect gains not easily calculable, 
as the advance of wages made to avoid a strike while the 
lesson of the consequences is still fresh. Opinion among 
workingmen is not a unit as to the value of strikes. A few 
years ago it seemed safe to say that strikes were declining 
as compared with the period of the early eighties. It is 
probably true, as is often said, that as laborers become edu- 
cated they put less faith in strikes. The epidemic of labor 
troubles, marking the years from 1899 to 1903, gave no 
evidence of a decrease in the use of strikes, yet many of 
these were due to the recent organization in various trades. 
The coal strike of 1902, though doubtless due to real griev- 
ances, was opposed by the officers of the union, an unusually 
capable set of men, but the more violent and discordant 
elements overruled the more pacific counsels. The public is 
perhaps as favorable as it has ever been to the cause of 
labor, but it appears to have less patience with strikes than 



§111] COMBINATION AND WAGES 253 

it had fifteen years ago, and strikes usually fail if not 
backed by public opinion. The public has not as yet thought 
out consistent conclusions on the question of the rights 
of the union. It is just now much impressed with the value 
of arbitration. As experience destroys the unsound senti- 
ments, and divides the wise from the unwise measures, a 
peaceable solution of industrial differences must and will be 
found. 



§ III. COMBINATION AND WAGES 

1. Wages in particular industries often are maintained wages are 
above the competitive rate. The older economic writers were y^^s^'^y* 
somewhat unsympathetic with trade-unions, and were even monopoly 
inclined to deny that organization could be helpful in any 
way in raising wages. This view, it must now be recognized, 
was mistaken, and overlooked the hindrances to competition 
and the effective economic forces that organization can bring 
into play. The sympathies of most men favor the wage- 
earner so strongly that they hesitate to express an opinion 
in any way unfavorable to his efforts to raise wages. But 
the view of the economic theorist as to the services of the 
union cannot be as roseate as is that of the union labor 
leader. The general proposition, however, is applicable, that 
wherever it is possible to limit supply, prices may be raised. 
If men fitted to do a certain work are not permitted to do 
it, labor in the special industry becomes more scarce and 
consequently more highly valued. This involves the result 
that some men are forced to remain where they get lower 
wages than they could earn if free to act. The temporary 
need of the employer may enable the union to force from 
him a division of his profits. If the trade-union watches its 
opportunity and takes occasion to strike when a failure to 
fill orders would cause him great loss, it may compel him to 
pay for a time more than the normal value of the labor. 
It may well be doubted whether such action on the part of 



254 



TRADE-UNIONS 



[CH. 27 



Exagger- 
ated claims 
made for 
trade - 
unions 



labor is generous, fair, honest, or in the long run wise; but 
that it may be immediately effective cannot be denied. By 
the principle of complementary goods an essential kind of 
labor can be given an artificially high value, if its supply 
can be controlled. If only the labor that is ready and willing 
to come in to take the place of the strikers can for a time 
be kept out, wages may be fixed practically according to 
monopoly principles, later to be discussed in connection with 
capitalistic organization. 

2. Trade-unions can, in various hut limited ways, set in 
motion economic forces to increase the productiveness of 
labor. It is difficult to take a moderate view of trade-unions ; 
it is easier to go to one extreme or the other. In a book by 
Trant, reprinted from the English edition and circulated by 
the American Federation of Labor as representing its theory 
and claims, all the advances in wages that have been made 
are said to be due to the trade-unions. This claim is believed 
by many besides the members of trade-unions. The thought 
is sometimes expressed even by social students that but for 
the trade-unions wages in America would be the same as in 
1850. Many well-known facts should cause such an opinion 
to be accepted with hesitation, to say the least. Only about 
one tenth of the workers in England are unionists and of the 
twenty-two million workers in the United States, far less 
than ten per cent, are organized. Can it be maintained that 
one tenth of the labor supply fixes the value of all? In 
many lines where labor is not organized, as in teaching, 
clerical positions, professional and domestic service, wages 
have risen even more than in organized trade. The evidence 
advanced to support the extreme claim is that wages are 
higher in some organized trades than in other unorganized 
trades requiring the same grade of laborers. Trant says 
that " where there are no unions wages should be lower. 
This is exactly the case"; and he quotes: "Wherever we find 
union principles ignored, a low rate of wages prevails and 
the reverse where organization is perfect." But he later 



5 III] COMBINATION AND WAGES 255 

explains in part this difference: " The union men are the 
best workmen and often employers pay a man more than 
union wages. This is not surprising as no man can be a union 
carpenter unless he be in good health, have worked a certain 
number of years at his trade, be a good workman, of steady 
habits and good moral character. ' ' 

If this be true, it is in accordance with strict competitive certain 
principles that, as the elite of the trade, they should get abie"reasons 
higher wages than those outside. Moreover the unions exist why union 
mainly in the more populated places where cost of living, ^h^o^j^be 
wages, and all prices range higher than in the towns. A higher 
much higher standard of work prevails in the cities, both 
among union and non-union men, and the old men and the 
inefficient drift away to the smaller towns and the places 
where wages are lower. Many of the differences are explic- 
able without taking any account of the union. So far as 
unions tend toward intelligence, education, sobriety, effi- 
ciency, fuller and fairer competition, they are economic 
factors in all branches of industry, and it cannot be doubted 
that they do work in some measure in all these ways. So 
far also as they strengthen the bargaining power of the 
laborers, or as they can enforce a monopoly of labor in a par- 
ticular trade and locality, they can secure the full competi- 
tive or even a monopoly price. 

3. Wages vieived in general industry, and in the long Labor 
run, are determined mainly by impersonal economic forces. °[onsTminor 
That implies the converse, that they are not determined factor in 
mainly by the trade-unions. This statement, in fact, is ad- '^"gs^oft^he 
mitted in calmer moments by the extreme partisans of the workers 
unions. Even the book before quoted says somewhat vaguely 
that "it is an error to think that the trade-union seeks to 
determine the rate of wages. It cannot do that. It can do no 
more than affect them." Again it says: " Capital is in- 
creasing faster than population. ... It seems therefore 
merely in obedience to natural laws that wages should 
rise." Men can easily see personal and immediate results. 



256 



TEADE-UNIONS 



[CH. 27 



The chief 
factors de- 
termining 
wages 



They cannot follow out the impersonal and ultimate work- 
ings of economic forces. The leaders make exaggerated 
claims; laborers believe them and pay their dues more read- 
ily; the public believes them and is the more inclined to 
pardon the excesses of so important an institution. That 
wages in a number of special trades are raised in a consider- 
able degree cannot be questioned. The open or secret use of 
violence and other anti-social forces make much of this 
boasted service to some of the workers, an injury to others, 
and an occasion of reproach from the citizen who condemns 
the spirit of lawlessness thus encouraged. The chief factors 
tending to raise the general standard of wages are the pro- 
ductiveness of industry, peace, order, and security to wealth, 
honesty in man and master, in lawmaker and in judge, the 
efficiency and intelligence of the workers, and an earnest 
effort on their part to get the share that competition would 
accord them. Chiefly, though not exclusively, because of 
their bearing on this last factor, trade-unions have a useful, 
even though subordinate, part in the regulating of wages 
over the whole field of employment. 



DIVISION B-ENTERPRISE AND PROFITS 



CHAPTER 28 

PRODUCTION AND THE COMBINATION OF 
THE FACTORS 

§ I. THE NATURE OP PRODUCTION 

1. The aim of industrial effort is the increase of the quan- Man's 



active inter- 
vention in 



tity and quality of scarce goods; this is economic production 
The thought has become familiar to the student that the production 
supply of economic resources of whatever sort is limited, g^^^*.^*"* 
while the wants are practically unlimited. A supply of 
consumption goods meets a perennial stream of wants, the 
result being that value is attributed to things. The aim of 
production is to add to scarce things, to make the supply of 
goods as large as possible. There is occasion here to recall the 
thought of the two aspects of production noticed in Chapter 
24. Man's part in production is passive when goods come 
into existence without his effort. One can imagine the 
indolent savage of the tropics, lying under the banana-tree, 
letting the fruit drop into his mouth. One can conceive of 
a tribe living upon manna, where every day the people 
awoke to discover a certain amount of food provided to each 
person's hand. Though no effort could increase that amount, 
still, if the food differed in flavor and the better qualities 
were rare, value would come into existence and exchange 
n 257 



258 



PRODUCTION AND THE FACTORS 



[CH. 28 



The four 

essential 
character- 
istics of 
value 



Economic 
vs. techni- 
cal changes 
in goods 



would arise. Now there is something very analogous to that 
in daily experience. There are some goods which effort can 
do little to increase. Usually, however, there is a possibility 
of change and adaptation to make them better suited to 
needs, and there is required the use of intelligence to choose 
among the goods and to employ them in the best way. Fur- 
ther, man can intervene and direct the course of industry ; he 
does not merely gather what is provided. It is this active 
intervention and effort that is here to be considered. 

2. To have value, a thing must he of the right stuff, in 
the right form, at the right time, and at the right place to 
gratify wants. A distinction is sometimes made between 
elemental, form, time, and place value. It is a mistake to 
say that the value of anything is due to any one of these 
features, for to have value all must be united in a single 
thing. But the distinction is useful in emphasizing the miss- 
ing characteristics, which if supplied, cause value to emerge. 
Ice may be considered to have form value when produced 
artificially by a machine, time value when stored from winter 
to summer, and place value when brought from the north to 
the south. But not less essential is the psychological condi- 
tion of a hungry and thirsty population ready to consume 
the ice. Any act or agent is said to be productive which 
works in any one of these respects: puts things in better 
form, or in a more fitting place, or provides them at a more 
fitting time to serve human wants. 

3. Economic production {in contrast ivith technical or 
merely formal production) is sii:h a change in goods as is 
attended hy an i^icrease in value. It is often well to contrast 
form, appearance, imitation, with the thing itself, the reality. 
Men sometimes go through the forms of study when their 
eyes and thoughts are wandering; through the form of 
getting a college education when they are simply having a 
good time. Likewise in production there is the form and 
the reality. The young lady just out of boarding-school 
rarely produces a masterpiece with the tubes and brushes 



vs. social 
production 



il] THE NATURE OF PRODUCTION 259 

that Raphael might have used. The justification for amateur 
work is to be found in the doing and not in the market value 
of the result. Blue rosebuds, painted with loving if unskilled 
touch on red velvet slippers, may bloom into a romance and 
happiness; but to the economist this appears to be a con- 
sumption of good pigment for amusement, iiot a creation of 
value. The difference between the form and value of pro- 
ductive eft'ort becomes, in the study of business organization, 
a most essential question. The significance of leadership and 
control of industry is found in this fact that economic goods * 
may be united to produce results having either a less or a 
greater value than the materials that are used. 

4. Individual acquisition may he contrasted with social Acquisition 
production in cases where the individual increases his wealth 
at the expense of others, without adding to value. Most 
economic efforts increase the income of the individual and 
the income of society at the same time. The fruits of the 
field and the uses of machines are net additions to current 
income ; they are not merely subtracted from the income 
of one and added to that of another. The increase of 
products by labor may depress somewhat the exchange value 
of competing labor, but the general welfare is furthered by 
the greater abundance. With very slight qualification it is 
true that in these cases the good of each is the good of all. 
But in some forms of human effort, social and individual 
interests clash. When two men bet, one gains and the other 
loses. The gambler's gain is a loss not only directly to his 
beaten opponent but indJi'ectly to society. Certain forms 
of speculation approach dangerously near to the appropria- 
tion of the goods of others, and others become outright 
stealing, or cheating so nearly like stealing that it would be 
treated as a crime if discovered. But many a man prowls 
along the border-line of crime all his life and succeeds in 
making large gains without falling into the clutches of the 
law. Cheating that can be detected, and outright stealing,, 
are prohibited by the law not because the burglar is an 



260 



PKODUCTION AND THE FACTORS 



[CH. 28 



Industries 
are socially 
more or less 
productive 



idler ; he loses sleep ; he has his trials too. The pursuit of 
burglary requires courage, effort, and ingenuity, but society 
does not reward these as virtues nor recognize as production 
the transfer of wealth from the bank-vault to the pocket of 
the burglar. It is the aim of social institutions to harmonize 
individual and social interests in the pursuit of wealth, to 
force men into lines of action where individual acquisition 
adds to the sum of social utilities. But there are many mar- 
ginal cases where human justice discriminates only in a 
bungling way, and many controverted questions arise at 
the meeting-point of ethics, economics, and law. 

5. In this sense, productive industries may he distin- 
guished from unproductive ones. The old distinction be- 
tween productive and unproductive labor rested on the idea 
that production must be embodied in material and lasting 
form. We have rejected this for the thought that the tests 
of production are to be found in feeling, not in outward 
things. The distinction, therefore, between productive and 
unproductive labor must now be ®f a very different kind. 
Viewed from the social standpoint, the efforts of men may 
be seen to be directed along more or less productive lines. 
Enterprise and effort shade off from the more to the less 
productive, from the extreme where the value is a net addi- 
tion to wealth, through other cases where one's gain is partly 
at the cost of others, to fraud and crime where there is 
merely a transfer of ownership. 



The factors 
of produc- 
tion defined 



§ II. COMBINATION OF THE FACTORS 

1. The various parts, materials, and agents that unite to 
form products are called the factors of production. In a 
general sense every separate thing that enters into industry 
is a factor; as, in agriculture, for example, the seed, plows, 
fields, fences, barns, cattle, labor. But usually in economic 
discussion, these numerous factors are grouped in large 
classes. The main factors are two, variously named as man 



§11] 



COMBINATION OF THE FACTORS 



261 



and nature, or labor and material agents, or humanity and 
wealth. Rejecting, as we have, the old view as to the nature 
of consumption goods and as to the nature and possibility 
of the distinction between "land" and artificial capital, we 
class under wealth all material economic agents whatsoever. 
The discussion of labor and wages has broadly laid down the 
principles that apply to the value of human effort, but the 
factor of directing energy presents in modern society so 
many important features that it calls for special and fuller 
consideration, 

2. The economic progress of society has been marked by Progressive 
decreasing dependence on the bounties and chances of na- cratroi^t 
tiire and by increasing control of natur-al forces by man. natural 
Various stages of progress in human history have been recog- *^°°'***""'^ 
nized. First is the stage of appropriation— ihe stage of 
hunting, or of fishing, or of gathering fruits. Man in this 
stage is still an animal in his economic methods, not guid- 
ing and controlling nature, but merely gathering what 
nature chances to bring forth. The limitations to man's 
powers in this stage are marked. There is excess of supply 
and waste at one season, scarcity and great suffering at 
another. With such crude utilization of the bounties of na- 
ture, a vast area will support but a small population. When 
sheep and cattle have been domesticated, and where there 
is a large area for grazing, industry rises to the pastoral 
stage. While still dependent on nature's bounties for the 
feeding of his cattle, man is hourly intervening to increase, 
regulate, and improve the supply of food and materials. 
Famines are more rare, economic welfare is greater, a greater 
population is nourished on the same area. The agricultural 
stage begins whenever man planis seeds, trims, tends, and 
increases by his care the supply of vegetable food. This 
is a still greater intervention in the course of nature. Man 
anticipates the future, directs forces, and groups materials 
to his purpose of getting a regulai- food-supply. lie is thus 
himself f(jrced into settled life, begins hand-pi'oduction, and 



262 



PRODUCTION AND THE FACTORS 



[CH. 28 



Increasing 
importance 
of skilled 
organiza- 
tion and 
direction 



The source 
of American 
enterprise 



makes the first steps in commerce. Then gradually comes 
the industrial stage, in which control over nature grows, 
supplies increase, machinery and motive forces are utilized, 
and humanity is in the full tide of industrial development. 
These are not sharply marked changes, but throughout all 
there is a growth of security, of certainty, and of productiv- 
ity. With man's increasing power and foresight, chance is 
lessened, for directing energy takes its place. 

3. For a high efficiency of production, as a whole, condi- 
tions nnist favor the best organization and direction of in- 
dustry. Industry is dependent primarily upon natural 
resources. Climate, rainfall, iron deposits, fuel, supply of 
wood or coal, predetermine in large measure the limits within, 
and the direction in which, the industry of any community 
can move. The progress of production depends also on an 
increasing efficiency of labor as embodied in individual men, 
and upon social and political conditions making possible 
an increase of capital. But — a condition as important as 
any of these — production is dependent also on a wise com- 
bination of the factors. Social, political, and economic con- 
ditions must be such as to call forth the factor of direction 
and control of industry, to make possible industrial progress. 
This is one of the greatest sources of America's superiority 
to-day. It has been strikingly said that it is now no longer 
"young America and old Europe," but "old America and 
young Europe." America is older in industrial experi- 
ence; Europe, with undeveloped resources, awaits the touch 
of American methods and machinery. There are dynamic 
forces in American society not present in equal degree in 
any other. It is therefore not alone the great resources of 
coal and iron,— equal resources may be found in unexplored 
parts of the world,— it is the dynamic social forces, inven- 
tion, enterprise, and organization, which have brought Amer- 
ica to the forefront in industry. Her natural resources have 
thus yielded an incentive and a premium to enterprise as a 
sort of by-product. Absence of caste, political liberty, the 



§I1J COMBINATION OF THE FACTORS 263 

democracy following the spread of the frontier, have not 
made it possible for every one to succeed, but they have made 
it possible, as nowhere else in the world, for real ability to 
scale the barriers of birth, poverty, arid hardship. A con- 
servative population never can equal a progressive popula- 
tion in industrial efficiency. It has been remarked that 
America has little to fear from Oriental competition so 
long as the avenues of education and enterprise are open to 
her young men, insuring her the highest capacity in the 
organization and direction of industry. 

4. A high efficiency of industry is dependent on many Growing 
social causes making possible a great specialization. It was ^^^^f'^S 
said in another connection that division of labor is dependent dustry 
upon the size of the market. With a large population massed 
at one spot, so that the demand for even the less important 
products is large, there may be a high specialization of 
industry. An increase of transportation, such as railways 
and telegraphs, is equivalent for many economic purposes 
to growth of population on one spot. In colonial days it 
took ten days to go from Boston to Philadelphia, and two 
weeks to go to Washington. San Francisco is now for many 
economic purposes but one fourth as far from Boston as 
Washington was at that time. California and the eastern 
states are distant only thirty minutes by telegraph and three 
days and a fraction by railroad, and are thus in many re- 
spects in the same market. The great development during the 
past century in the means of communication and of carriage 
has made possible, as never before, the massing of population 
to secure the advantages of division of labor in most lines, 
without meeting the hitherto insurmountable difficulty in the 
securing of food for such large numbers in a limited space. 
The population draws its food from the whole vast area; 
whereas it is massed at the points more favorable for other 
products and can make use of the most highly specialized 
machinery. Those several conditions thus have favored the 
growth of large industry under a single control and direc- 



264 



PRODUCTION AND THE FACTORS 



[CH. 28 



Growing 
importance 
of directive 
ability 



tion, on a scale never before approached. These changes 
have brought in their train social problems connected with 
the concentration of economic power. It remains to be seen 
whether the unquestioned economies of this new organization 
can be retained and improved while it is divested of its evils. 
5. With the growing division of labor, grows the need of 
the highest ability for the directing of industry. Ability 
may be judged by various standards. From one point of 
view, the scientific mind, grouping facts in the cold light 
of reason to arrive at truth, is the highest type. But su- 
preme, each in his own sphere, are also the artist expressing, 
through painting, poetry, dramatic action, and music, the 
subtleties and complexities of feeling, the moral philosopher, 
the prophet, the preacher, in the best sense of the term the 
teacher, all aiding to guide the spiritual forces of humanity 
along lines that make for social welfare. Not least is the 
business enterpriser, whose function is to direct the economic 
forces for production. It is vain to assign a mean place to 
the organizing intelligence and its social work. Its im- 
portance grows apace with the growing magnitude and com- 
plexity of industry. Misjudgment now will destroy more 
wealth, and wise judgment can produce larger results, than 
ever before. The captain of industry also may work as an 
artist or as a gambler; he may, by the methods he pursues, 
uplift the moral plane of his society or he may help to 
corrupt and degrade it. No citizen is in control of more 
potent influence for good or ill than the successful business 
organizer. On the attitude of society toward him, and on 
the standards to which he is held, depend in large measure 
the use that will be made of his exceptional powers. 



CHAPTER 29 

BUSINESS ORGANIZATION AND THE 
ENTERPRISER'S FUNCTION 

§ I. THE DIRECTION OF INDUSTRY 

1. In the simplest hinds of individual production the judgment 
value of the results depends largely on intelligent choice. a^<iseif- 

-r-i r>i 1- 11- Pi-i- direction as 

Even for the solitary worker the choice oi the right time elements in 
to do work is most important. The first thine Robinson personal 

. skill 

Crusoe did was to turn to the ship to save as much as 
possible of the cargo before it was dashed in pieces by the 
waves. If he had begun first to till the soil to provide 
a future supply of food it would have shown one kind of 
foresight, but it would have shown very poor judgment. 
Every moment of delay in recovering the cargo of the 
wrecked vessel cost him many useful materials. The hum- 
blest farmer has a great range of choice and a need of good 
judgment in fixing the time to sow, to reap, to do each simple 
task. There is the same need to-day for the small shop- 
keepers, for the blacksmiths, for the small producers of all 
kinds to make wise choice of time in the use of their own 
labor. There is also a wide range of choice in the distribut- 
ing and combining of labor, agents, and materials. A lim- 
ited supply of agents can be used to secure a variety of 
goods, more or less desirable. There are many chances for 
mistake, but in the long run it is judgment, not chance, that 
determines the success of one man as compared with another. 
There is a choice in ways and methods by which a thing 
can be done. There are many wrong ways, there is but one 

265 



-itiU 



THE ENTERPRISER'S FUNCTION 



[CH. 29 



Direction of 
a group of 
workers 



Direction of 
interrelated 
groups 



best way, at any stage of industrial progress. While most 
work is done in customary ways and little independent 
judgment is required, yet in every business from time to 
time new problems arise and call for an exercise of choice 
as to methods. Moral qualities are continually called for, 
such as control of impulse, and the giving up of the comfort 
of the moment. The wisdom of our fathers is embodied in 
a multitude of proverbs that suggest the wise course. Men 
must " make hay while the sun shines," not lie in the 
shade. But virtue fails less often from lack of knowledge 
than from lack of will. As men differ in judgment, charac- 
ter, and will-power, their products differ, even in the simplest 
circumstances. The ability to choose and to do wisely is an 
element in personal skill. 

2. When men work in an associated group, the direction 
of effort hecotnes relatively more important. The first and 
simplest advantage of association is working in unison. 
Men unite their muscular efforts for a single task, and ac- 
complish what is impossible to them working singly. But 
when many work in unison, the right selection of time and 
way is of greater importance; a mistake will waste more 
materials and agents. If association is to yield its advan- 
tages, there must be division of labor; hence harmony of 
effort, hence agreement or direction. While the gain of 
well-directed association is large, the waste of ill-directed 
effort is greater, when specialization has taken place, than 
with isolated workers. Most communal societies have failed 
because of the lack of a good head. The few exceptional 
successes have been due to the presence of a man of superior 
ability, such as George Rapp of the Harmonist Community, 
who, had he lived in this day, could have become easily the 
head of a great business corporation. 

3. Where various industrial groups are associated, direc- 
tion becomes still more important. In the single group it 
is an internal harmony alone that is needed. The work of 
a dozen men must be so arranged that each is in his fitting 



§11] QUALITIES OF A BUSINESS ORGANIZER 267 

place. But as this group comes into contact with others, the 
relationship becomes two-fold, and there must be both in- 
ternal and external harmony. The more complex the eco- 
nomic organization of society, the more the chance of mistake 
and the- more injurious are the mistakes to a wide range 
of interests. Large amounts of capital and labor can be 
rapidly lost through lack of wise direction of associated 
groups. 

4. The increased efficiency of industry has heen accom- Greatest 
panied hy the specialization of control. The crude, early ^^^j^"""^"' 
methods of enforcing harmony in industry were slavery and direction of 
political subordination. Under division of labor, with free industry 
workmen, industry is ruled by impersonal economic forces 
that bring the less capable under the direction of the more 
capable. This work is rudely done, no doubt, but the penal- 
ties of bad direction of labor and capital are so great that 
blundering cannot be permitted. The man who shovels dirt 
must do it at the right time and place if, in this complex 
society, it counts for something and gives the effort value. 
If he cannot choose well for himself, he comes under direc- 
tion. The average man cannot decide nearly as well here 
as he could on a desert island where and when to put in 
his spade. There it would be to raise food for the current 
year; here it may be to dig a canal or a tunnel whose uses 
will not become actual for many years. The more distant 
the end sought, the more difficult is the choice. To every 
worker, according to his personal skill, is left some degree of 
choice in the method of his work, but in a large part of in- 
dustry the range of choice is very narrow. The man with the 
shovel and the man with the hoe come under direction. 

§ II. QUALITIES OP A BUSINESS ORGANIZER 

1. The organizer and director of industry must first have Technical 
iechiiical knowledge of methods, processes, and materials. ^J^^^i*^* 
The qualities required in the direction of industry are im- 



268 THE ENTERPRISER'S FUNCTION [CH. 29 

plied in the foregoing section, but they may be more 
specifically enumerated. Knowledge of technical processes 
is relatively more important in the direction of industry in 
the earlier stage. In the single independent producer it is 
the quality most desirable. He must know the quality of the 
materials with which he works and the best modes of com- 
bining them. But, as industrial organization becomes more 
complex, only a broad knowledge and ability to judge of the 
results of different processes and to compare plans are ne- 
cessary in the organizer. He can hire the technical knowledge 
of details required in the larger management of business. 
Draftsmen, engineers, pattern-makers, men with far more 
education and capacity in certain lines than the business 
manager, work under his direction. 
Judgment 2. The Organizer requires ability to judge men and tact 
°^"^° in relations with them. In the small group, ability to get on 

well in personal contact with workmen is of great impor- 
tance. Especially rare is the genial manner that wins the 
confidence and even the affection of the men. A sense of hu- 
mor and the ability to turn a joke are said to have obviated 
many a strike and thus to have prevented losses both to 
the employer and to the men. In large affairs much of this 
managing tact can be hired in good foremen ; but the organi- 
zer must still have a knowledge of men, ability to judge of 
human nature, to select his subordinates, and to animate them 
with his own purposes and plans. Mr. Carnegie has said 
that an appropriate epitaph for himself would be, " He 
was a man who knew how to surround himself with 
men abler than he was himself." That seems too modest; 
but in a sense it is not, because he claims for him- 
self, and justly, the highest of all industrial qualities. A 
great administrator in political or industrial aft'airs can dis- 
pense with everything else rather than with this, the supreme 
quality of the great organizer. 
Foresight in 3. The Organizer must have unusual foresight and the 
STs^'"^ a&ai^i/ to form a large commercial policy. This proposition 



§11] QUALITIES OF A BUSINESS ORGANIZER 269 

is to be interpreted relatively to the task before the organizer, 
and to the size of the business. Modern industry anticipates 
demand far more than did primitive industry. Large 
amounts of materials and energy are embarked in directions 
from which they cannot be recalled. With the progress 
of electrical engineering it soon may become possible to 
recall at any moment a cargo embarked for a distant port. 
But no wireless telegraphy is able to recall the great masses 
of capital that are embarked on distant and definite journeys 
in modern business. The organizer anticipates future de- 
mand, and prepares for it. The process has been figuratively 
expressed somewhat as follows: the enterpriser throws into 
the crucible great quantities of material ; they melt, and an 
industrial result is secured, but whether the deposit is 
greater in value than the material is a question that cannot 
be answered for years. The need of anticipating demand 
is greater to-day than ever before, and this requires large 
investments months and even years in advance. The losses 
are proportionally large if there is miscalculation of demand. 
A large commercial policy is one that takes into account the 
more distant factors, and anticipates the new conditions. 
The rare ability to do this is rightly called statemanship in 
economic affairs. 

4. The organizer need not Jiimself have great wealth, hut commandof 
he must have ability to command financial resources. Busi- 
ness to-day is done in many cases with borrowed capital. 
Even a subscription to stock is frequently as much in the 
nature of a loan, made in reliance on the reputation of 
the organizer, as an investment for profits. There are many 
temporary needs that require sudden loans. The confidence 
of investors, whether banks, trust companies, individual 
shareholders or investors in bonds, must be secured by the 
organizer. Good judgment of the money market often is as 
vital as judgment of the market for the particular product. 
In some of the largest corporate enterprises this quality 
becomes the most essential. 



financial 
resources 



270 



THE ENTERPRISER'S FUNCTION 



[CH. 29 



Scarcity of 
great or- 
ganizing 
ability 



The indus- 
trial leaders 



5, Organizing ability of the highest order is rarely found. 
This is almost a superfluous statement after the foregoing. 
According to the theory of chances, such a combination and 
balancing of qualities is likely to occur in very few cases. 
Even where it exists, it may not be discovered or devel- 
oped. The man may not find his opportunity, nor the task 
the man. There are many misfits in the world. On the 
occasion of the visit of Prince Henry of Prussia to America, 
in 1902, he was entertained at luncheon in New York with 
one hundred of the leaders in invention, finance, and in- 
dustry, w'herein have been the most characteristic achieve- 
ments of America. In jocular reference to the French 
Academy, whose members are the forty most noted literary 
men of France, the newspapers called this the meeting of 
America's one hundred immortals. There were J. P. Mor- 
gan, the great financier; Vanderbilt, Hill, and Harriman, 
the railroad kings; Carnegie, the iron magnate; Irving 
Scott, " the man who built the Oregon "—nearly all the 
company deserving a place at the table mainly by reason of 
excellence as business organizers. Such a gathering has a 
dramatic interest as presenting the greatest leaders of in- 
dustry, but about other tables might be gathered thousands 
of other less notable figures worthy to be accounted captains 
of industry in their several fields. One may well ask. How 
did they come into the important places they occupy 1 



Various 
roads to in- 
dustrial 
leadership 



§ III. THE SELECTION OF ABILITY 

1. The men actually in control of industry have been se- 
lected in manifold ways. Skill develops a small industry 
into a large one. A small factory owner gradually adds 
machine to machine, building to building, till he finds him- 
self at the head of a great industry. Or an employee de- 
velops ability and becomes an employer. Who does not know 
of some one who, as a small boy, went into a store to do 
chores, worked up to a clerkship and, enlisting the confidence 



§111] THE SELECTION OF ABILITY 271 

of men of wealth, was enabled to establish a business of his 
own and become an employer? Others have won promotion 
from the ranks to the head of a large industry in which they 
secured at last a controlling interest. Employees that have 
proved their ability may be selected by the directors of a 
stock company. ]\Ien that have worked their way up from 
the ranks may bequeath their business positions to their sons 
and grandsons, as in the case of the Vanderbilts and the 
Goulds. And finally, but rarely, there may be selection by 
fellow-workmen in the case of cooperative business. 

2. There is a constant selective process: dropping out success as 
the weak and advancing the efficient organizer. There is, of^j^^^^"*^* 
to be sure, an element of chance in this selection. The 
process in general is a rude one. Accidents and unforeseen 
changes, industrial crises, failure of health at a critical 
moment, fraud and crime; may defeat men of ability and 
they may never regain their foothold. Lack of experience 
may lead to disaster a naturally able but youthful heir, too 
suddenly burdened with the responsibilities of a fortune. On 
the other hand, men of limited ability may inherit fortunes 
and preserve them by caution, without enterprise. It is not 
always true, even in America, that "It is but three genera- 
tions from shirt-sleeves to shirt-sleeves," although many 
fortunes slip away from the sons of rich fathers. In general, 
success in retaining the control of a business is an evidence of 
considerable ability. By loss of fortune unwisely risked, 
through unforeseen changes in methods, and after manifold 
blunders, the less capable drop out. Thus, by the ceaseless 
working of competition, the higher places are taken by those 
most capable of filling them, and the efficiency both of the 
employers and of the workmen is increased. 

8. //( the various kinds of business organization the nier- various 
its of men and of methods are tested. The independent ^J^^'jJor- 
producer working entirely alone, directing his own industry, ganization 
is analogous to the animal organism of a single cell. More 
complex is the family partnership found often in early stages 



272 THE ENTERPEISER'S FUNCTION [CH. 29 

of industry but more rarely now, where the father directs 
the work of his children and all share in common. The 
simplest form of the wage system is the single employer with 
a few assistants. When the employer is in danger of losing 
valuable assistants, he sometimes gives them a share in the 
business. In the ordinary partnership, two or more men 
divide the ownership and duties, agreeing as to the division 
of control. Cooperation among workmen, though rare, gives 
an unusual opportunity for the discovery of special talent. 
The dominant form of organization to-day is that of the 
stock company, or corporation, the ownership of which is 
divided among the holders of shares of stock, or of certifi- 
cates of membership. 
Many This variety of organization affords opportunity for a 

chances to two-fold tcst : that of the ability of men and of the merits, 

try ability 

in varying circumstances, of the different forms of or- 
ganization. Methods of organization are constantly tested 
by their results. Men having money to invest are asking 
whether they would be better off to go into business by 
themselves, or to join with a partner, or to buy stock in some 
large corporation. Each of these forms of organization has 
its peculiar advantages. A stock company can better enlist 
large amounts of capital, while the individual employer is 
generally more free from dictation and can adapt his busi- 
ness more quickly to changing conditions. At the same time 
this variety of organization offers better opportunities for 
managing ability to show its metal. On the watch towers 
of industry are many observers sweeping the horizon for the 
appearance of men of business talent. Some characters 
develop better under direction; others prove that nowhere 
does native ability count for more, and mere book-schooling 
for less, than in business administration. There is some 
ground for the belief that a college education does not in- 
crease executive capacity in business. Such ability often 
seems to be a freak of nature and a product of practical 
experience, rather than the result of college training. 



CHAPTER 30 
COST OF PRODUCTION 

§ I. COST OF PRODUCTION FROM THE ENTERPRISER'S POINT OF 

VIEW 

1. The task of the enterpriser is to get together the es- xheenter- 
sential factors to secure valuable products. The enterpriser Poser's cost 
must first decide what product he will endeavor to secure, and 

the kind, the place, the time, the quantity, and the quality. 
He must then select in the right proportion the materials, 
labor, plant, and machinery necessary for that product. He 
must purchase these factors in the market at the lowest price 
he can, unite them and sell the product to recover the ex- 
penses in the selling price. A thousand items enter into the 
cost and perhaps a single product emerges. What the busi- 
ness man thus pays out, expressed in money form, are the 
costs that are here to be considered. 

2. The term cost of production is used in several senses, several 
the chief of which are money cost, psychic cost, and alterna- 
tive cost. The ambiguity of this term is a source of much 
confusion. Psychic cost is the pain, fatigue, irksomeness of 
labor. This is not definitely measured except at rare points. 
When the pain of woi-k more than offsets the value of the 
product, the worker who is free to determine the length of 
his own working-day, stops. At that point the psycliic cost 
and the utility of the marginal unit are almost ecjual in 
intensity— the one as a positive, the other as a negative 
quantity. But the value of the product as a whole cannot be 
related to the psychic Qost or sacrifice, and therefoj-e it cannot 

18 273 



meanings of 
cost 



274 COST OF PRODUCTION [CH. 3o 

serve as a measure of cost in every-day business. Alternative 
cost is any good or gratification that must be given up when 
any other good is chosen. One may stay at home and read 
a book or go on a picnic ; the pleasure of reading the book 
will cost the pleasure of the picnic. A good dress may 
cost a happy vacation that must be given up for it. In this 
sense, each thing is a cost of every other thing that might 
be chosen in the place of it. Alternative cost is therefore 
manifold and indefinite. The thought is significant at the 
moment of a choice, but it is not constantly measurable for 
practical purposes. The money cost is the practical cost 
generally implied in the term cost of production. It ex- 
presses not the pain of the laborer in doing the work, not 
the sacrifice of the owner of the capital in saving the money, 
but merely the sum of money paid out by the producer. 
There is frequent confusion of these ideas in economic 
discussion, few even of the leading economists of the nine- 
teenth century having quite escaped it. 
The cost of 3. The enterpriser, looking upon the cost of most of the 
thefactors factors as fixed, seeks to comhi7ie them as economically as 
ket price possible. Whether the enterpriser is running a factory or 
a farm, is engaged in a retail or a wholesale store, is con- 
ducting a school or a railroad, he has to solve much the 
same problem. By close attention, good judgment, skilful 
bargaining, he may be able to buy slightly cheaper than his 
competitors, and thus have an advantage over them at the 
outset. When he does this, it is usually by searching out a 
better market in which to buy, buying at a better time, and 
judging better than his competitors the quality of goods. 
If, in a given market at a given time, goods are sold to one 
more cheaply than to others, it is an act of generosity. Even 
the best buyers pay nearly the prevailing market price for 
agents. The most successful enterprisers are not found to be 
those paying lower wages or lower ground-rent than their 
competitors. It must not be forgotten that the main forces 
fixing the prices of agents are impersonal, and can be only 



51] 



ENTERPRISER'S COSTS 



275 



slightly modified in most cases by a particular buyer. He 
looks therefore upon the cost of the elements as an ultimate 
fact which he can change little, if at all, and he shows his 
judgment chiefiy in the selection of (luality. Cost determines 
and limits the extent of his business and determines the price 
at which he sells. 

4. The right proportioning and skilful suhstitution of 
the factors is a delicate technical task for the enterpriser. 
Good buying and good selling must i:)recede and follow the 
central part of the enterpriser's task, that is, the combining 
of the various factors. Each factor is applied, subject to 
diminishing returns, up to a point where its addition will 
not secure the value attributed to it in its cost. The enter- 
priser is constantly studying the question whether the appli- 
cation of another unit of any one factor at the price will 
add to the value of the product as much or more than the 
cost. This calculation is made for every one of the minor 
factors entering into the business, and for the business as a 
whole. The proper proportion varies at different prices, or 
costs. If wages rise, "it pays" to get machinery; if wages 
fall, it pays to let the machinery deteriorate and to do more 
by hand-labor. Likewise there is constant substitution of the 
various materials. The right proportions change constantly 
with inventions. A model factory is so proportioned that the 
buildings hold the right number of machines, with the right 
amount of space for the workmen, and the right amount of 
power. If there is more of a single factor than the ideal 
proportion, it is an unnecessary cost. Even the model fac- 
tory begins to be out of date almost as soon as the walls are 
dry, and the latest method is to build as nearly as pos- 
sible on the unit system, so that new parts may be added 
without the loss of harmony and proportion. 

5. The enterpriser's costs determine the lowest price at 
which he can continue to sell, hut if success fid he may have 
a wide margin of profits. New factories are constantly aris- 
ing with new and better adjustments. In industries of 



The right 
proportion- 
ing of the 
factors 



Pressure of 
price to- 
ward cost at 
certain 
points 



276 



COST OF PRODUCTION 



ICH. 30 



The enter- 
priser in 
contact 
with costs 



competing products, also, the processes are changing. Hence 
there is always a pressure of competition on some enter- 
prisers who constantly complain that they must sell below 
the cost of production. The organizers of a trust always 
declare, some no doubt truly, that they have been selling 
below the cost of production. Business men say that compe- 
tition is destructive, and it certainly does destroy the less 
favorably situated enterprises. Each enterpriser's price is 
the highest he can get in the market for his product; it 
may far exceed his costs; it may even fall below them, but 
only temporarily, for if sales continue to encroach on cap- 
ital, the sheriff soon closes the doors. Successful competitors 
are constantly pressing upon the marginal enterpriser, fix- 
ing a price that leaves themselves a profit, but is below his 
cost. Even the most successful enterpriser comes into con- 
tact with cost, and seems to be compelled by it. He reaches 
out for trade, and sells some (not all) goods at a price which 
leaves him no profit. He enlarges his factory and ships 
goods farther, paying the freight, which means a lower price 
at the factory. The expanding business, therefore, comes at 
length to the point where it cannot go farther at the prevail- 
ing prices. Hence the business man's view of the costs is 
that they determine value. It is true in the sense that 
the supply of a particular product in any market is at last 
limited by cost of marginal producers or of marginal por- 
tions of supply. But it is not true of all the units of product 
that costs determine, or equal, market price. There is a mar- 
gin above costs to the successful enterpriser on a large 
portion of his output. The margin may be narrow or wide, 
according to the business. The margin is " profit," or the 
gain of the enterpriser. 



§ II. COST OF PRODUCTION FROM THE ECONOMIST 's STANDPOINT 

1. TJie economist should view money cost as an interme- 
diate and not as an idtimate explanation of value. The 



§111 FROM THE ECONOMIST'S STANDPOINT 277 



value of all things must be traced back to gratification, to the Money cost 
relation of goods with psychic income. This being true, °°!.^® 

° ^ •' D J ultimate 

the value of the factors which the enterpriser uses must be explanation 
derived from the value of the products, and not the reverse. °^ ^^"® 
This does not mean that the business man is deceived into 
the belief that he has in cost of production a final explana- 
tion of value. He simply is not interested in that question. 
He knows that there are many influences determining the 
cost of the factors he buys, but they are distant ; he cannot 
influence them, and in the single stage of his production 
they seem to fix the price. In some purchases, and on the 
stock exchange, a marvelous recognition and analysis of the 
most distant influences is necessary; but in general a super- 
ficial view of value is taken in business; it does not pay to 
do other. The logical treatment, however, must go deeper 
into the question and trace the cost of agents back to the 
ultimate cause of value, that is, to want-gratifying power. 
To say that the price of a product is determined by the 
money cost, or price, of the factors is simply to postpone 
the answer to the question of value; one has still to ask, 
What determines the money cost, or price, of those factors 
themselves ? 

2. Tlie demand for any factor entering into products is The cost of 
reflected, in an increased price, to its cost in all competing If^^l^^ 
products. Figuratively speaking, products compete with their mar- 
each other for the factors that enter into them. According f^^^fj,^^'^!^ 
to location, quality of the soil, and improvements, a certain tiveuses 
area of land has various rival uses. These uses bid for the 
land, or put in an economic claim for it. Products of a 
higher value outbid and exclude those of a lower. If fine 
wine can be raised on a piece of land, potatoes ordinarily 
will not be planted in it. But if there is such a supply of 
that quality of land that it continues to be used side by side 
for both products, it will have the same value and yield the 
same rental in both uses. The least utility yielded by any 
portion of the supply fixes the value of all the units. 



278 



COST OF PRODUCTION 



[CH. 30 



A single 
source of a 
single pro- 
duct 



One source 
of several 
products 



Machines are usually made for some product determined in 
advance, but often they are only partially specialized and 
within limits they can be adapted. Sewing-machine facto- 
ries were readily turned to the making of bicycles at the 
time of greatest demand, and bicycle factories later were 
used for the making of automobiles. Thus, in general, machin- 
ery is used for the product to which it contributes the most 
value. Any enterpriser seeking it for any other use finds its 
"cost" affected by its various alternative uses. The same 
is true of all the materials and of all the grades of labor 
entering into products. The enterpriser's cost is therefore 
the reflection of the want-gratifying power of the productive 
agent in all its other uses as well as in the particular product 
he desires. To the enterpriser, cost seems the cause of the 
value of a product. To the economist it should be clear that 
the utility found in the various products is the basis of value 
in the factors, i. e., of the costs. 

3. The genealogy of value may thus he traced through the 
various intermediate products to co7isumption goods. A 
single product having a single source of supply shows most 
clearly the reflection of value directly from the product. 
The discovery of a mineral spring or of a good quality of 
building-stone on worthless land, will cause a value to at- 
tach at once to the source of supply. When a great singer 
like Adelina Patti commands several thousand dollars for 
each appearance in concert, the source is the magical throat 
of the singer, and the salary reflects the utility of the music 
in the minds of delighted hearers. 

When the one source of supply yields several different 
kinds of products there is just one new condition which con- 
fuses the thought and suggests the error that value begins 
in the source (with costs therefore) and not in the product. 
Looking at the products severally, no one of them explains 
the value of the source, and, on the contrary, each one is seen 
to have a value independent of the particular use to which it 
is put. To make the illustration most simple : a savage finds 



§11] 



FROM THE ECONOMIST'S STANDPOINT 



279 



in a wreck on the coast a number of bars of iron. His 
fellows wish them for various purposes : to make arrow heads, 

Source 




Pfne/ucf- 

I. A single Product 
2. Several Products from one Source 

spears, knives, hatchets, hoes, ornaments, nails, needles, etc. 
Value is in this case derived in part, through the source, 
from the alternate uses. Taken jointly and considered as 
one sum, the value of the various products accounts as com- 
pletely and exclusively for the value of the source as if they 
were merged into one product. The source (^) is distributed 
to each of the products in accordance with their marginal 
utility, and therefore the value of the various products 
from any source of supply constantly tends to equality. 
Any unit of product sought for any purpose must be paid 
for accordirlg to a marginal utility determined in all the 
applications. The genesis of the value is in the utility of the 
product ; the value of the source is derived. 

In actual life the problem is far more complex, and yet, complex 
through its settlement runs just the same principle. There ^,"^\n7gf. 
is constant bidding for materials, and through their price mediate 
the claims of rival products are adjusted. A point is ^"^^ ""^ ^ 
reached where it does not pay to use any more of an agent 
in a certain industry ; the production of another unit results 



280 



COST OF PRODUCTION 



[CH. 30 



The enter- 
priser the 
medium of 
price move- 
ments 



in a loss. There is a most complex relation among many 
different industries using the same factors, the value of 
a unit of product (at a) being reflected up to the source, and 
through successive links to the most distant product (2). The 




a b c d e f yz 

3. Complex Relations Through Intermediate Products 

effect of this is to reduce the sale (of 2;) and correspondingly 
the use made of the agent in question. A higher price of 
leather, due to the increased use of shoes, raises the value 
of hides and cattle (this increasing the extent of cattle 
raising) and raises thus the cost of carriage-trimmings, 
pocket-books, foot-balls, leather belts, and every other leather 
product. As the price rises, substitutes for leather, and im- 
itations of it, are used for such of the products as cannot bear 
the increased cost of leather. 

4. The enterpriser does not fix the value of products or of 
agents, hut is the medium through which consumers express 
their estimates. The enterpriser who anticipates aright and 
satisfies the public taste is the good medium. He readily 
transmits and accurately focuses the rays of public judg- 
ment. One that misjudges is a poor medium. The enter- 
priser is himself the servant of costs. Laborers sometimes 



§11] FROM THE ECONOMIST'S STANDPOINT 281 

assume that the employer can dictate wages, prices, and 
markets, can rule things with a lordly hand. With rare 
exceptions the ultimate control in these matters by business 
men is very slight. In the main the enterpriser masters 
the situation only by bowing to it, just as the scientist and the 
engineer gain mastery over nature because they know when costs are an 
to bend and how to obey. The consumer, by deciding to buy of^onsum- 
this or that product, sets in motion waves of value. The ers^esti 
consumers of products are the true purchasers of labor, 
materials, and uses of agents. The enterpriser must conform 
closely to cost, to the price prevailing for the moment, or his 
competitors in this day of narrow margins will seize the 
opportunity. The enterpriser is merely the distributor or 
equalizer of cost among all the different products for which 
different agents can be used. If he acts efficiently, profits 
arise. 



mates 



CHAPTER 31 
THE LAW OF PROFITS 



Broadest 
use of the 
term profit 



Used of 
gross gains 
on sales 



§ I. MEANING OF TERMS 

1. The term profit is popularly used as any gain or ad- 
vantage secured hy any means in business. The terms used 
in economics, being taken from popular language, vary in 
meaning according to the context. It is necessary to clear 
thinking to reject some words entirely and when using others 
to define them more strictly. The broad usage of the term 
profits just noted includes every kind of return to industry : 
such as interest on capital, and wages or services of the man 
owning the industry. Precise thinking requires its use in a 
much narrower sense. 

2. A common meaning of profits in retail business is the 
gross gain on a given sale. Buying an article for one dollar 
and selling it for two dollars, is said by the merchant to 
be selling at one hundred per cent, profit, jocularly called, 
" The Dutchman's one per cent." The cost price is con- 
sidered to be that paid to the manufacturer or wholesaler. 
In different lines of goods there is added regularly to this 
cost twenty, thirty, or fifty per cent., as the case may be, as 
the merchant's profit on the sale. This is of course a gross 
profit, and not net, or true profit. It leaves out of account 
rent, interest on capital, clerk hire, freight, and many other 
minor items that enter into the cost of running a store. It 
often happens that the Dutchman's way of reckoning is 
nearer the truth, and that the gross profit of one hundred 
per cent, proves at the end of the year to be only a net 

282 



511 MEANING OF TERMS 283 

profit of one per cent. This evidently is a loose meaning, 
impossible in the discussion of theoretical questions. This 
meaning is sometimes developed, making profits the sum of 
all the gross profits on separate sales within a year, or the 
difference between the wholesale and retail prices of goods 
sold within the year. 

Another meaning given to the term is gross profit (as 
above) compared with the capital invested. The "profit" 
in this case varies partly with the rate of the turnover. 
To illustrate: if the amount invested in a printing-office 
is $100,000, and the annual business done is $300,000, the 
capital is said to be turned over three times; if the gross 
profits on sales averaged twenty per cent., they would be 
sixty per cent, on the investment; but, if the capital had 
been turned over four times, the gross profit would have been ' 
eighty per cent, on the investment. 

3. Another meaning of profits is the annual net gain of net gains 
of the husi7iess, as compared with the average investment of ^^aper- 

' _ '■ ^ _ ' centage of 

capital. This is a long step toward greater definiteness. If invested 
at the end of a year it were found that after paying all *^p'**' 
outside expenses there were $10,000 to set aside, this 
would be accounted a profit of ten per cent, on $100,000 
invested. But confusion still reigns because of wide varia- 
tion in the methods of estimating costs before fixing net 
profits. In one case the enterpriser rents lands and build- 
ings, in another he owns them ; in one case he has borrowed 
money and counts interest as a cost, in another he is free 
from debt; in one case he counts as a part of cost an esti- 
mated fair salary for himself and his partners, in another 
(usually in a small business) no such allowance is made 
Such a variation in business usage is most perplexing. In 
all these cases one must have the exact conditions in mind 
before it is possible to make any comparisons and draw any 
conclusions as, to the relative profits of different ind\istries. 

4. In the narrower and exacter sense profits are the net Profits in 
gain of the enterpriser after counting the rent of material ^g"^' 



284 



THE LAW OF PROFITS 



[CH. 31 



Profits a 
species of 
wages 



agents and contract wages of employees at the prevailing 
rates. Into the practical problem of cost and profit many 
factors enter, and the theoretical problem is to determine 
just how much ought to be attributed to each. In a large 
business usually the practical bookkeeping problem is not 
unlike that of economic analysis, A stock company counts 
as cost, as a part of fixed charges, interest on capital bor- 
rowed either from banks or bondholders. Its managers are 
paid salaries, counted as a part of cost. The net balance, 
after deducting these and all other expenses, is counted 
profits and paid in dividends to stock-holders. The economic 
student is not attempting to get a theory of profits that is in 
contrast with practice. Rather, he is trying to analyze profits 
generally, just as they are analyzed in the few cases where 
the books are properly kept. In economic theory, therefore, 
profits are the part of the gain of any business that is logi- 
cally attributable to fortunate investment and good man- 
agement; profits are the income attributable to the enter- 
priser's services. 

5. Typical economic profits are thus a species of wages 
hut are marked hy peculiar features. In some of the older 
treatises on political economy, profits are treated merely as 
a combination of "wages of management," and of interest 
on capital invested. A man hired at a fixed sum to manage 
a business is receiving simply contract wages. Economic 
profits are not contract wages, not being paid by agreement, 
but being yielded impersonally by the industry. Profits are, 
however, economic wages or the earnings of services. As 
business has developed, it has been seen that the enterpriser's 
work has its peculiar character and deserves special atten- 
tion. The old English word " enterpriser," used of the 
" adventurer " who embarked in foreign trade, may fittingly 
apply to the organizer and director of business to-day. 
Foreign trade then, more often than now, was most uncer- 
tain, and there were many chances that the ship would be 
lost, or the venture prove a losing one. In the simplest 



§11] THE ENTERPRISER'S SERVICES REVIEWED 285 

business to-day there is this element of enterprise, or under- 
taking, combined Avith ordinary capital and labor. As 
industry develops, this special service stands out more clearly. 
In the corner-grocer and in the manager of the little news- 
stand, the elements of enterprise and labor are not apart. In 
the large wholesale house, the enterpriser is seen to be not 
merely an abstractly thinkable function, but a separate and 
concrete person. The typical enterpriser is the man who 
gives his time and energies to the launching and guiding of 
business. 

§11. THE TYPICAL ENTERPRISER'S SERVICES REVIEWED 

1. The enterpriser guarantees to the capitalist -lender a Theenter- 
fixed return. Agents will yield the highest economic rent skufliuse 
of which they are capable only in the hands of those who ofcapiui 
can use them with exceptional skill. Owners of capital who 
for any reason, such as youth, inexperience, ill health, inca- 
pacity, or conflicting duties, are not able to make agents yield 
the average rent, seek out, or are sought out by, those who 
in general can make the agents yield more than the average. 
The interest contract between them is one of mutual advan- 
tage, in that the enterpriser pays a definite sum to the 
investor unable himself to apply his productive agents. Im- 
mense sums of capital are now put into the hands of small 
enterprisers, such as Western farmers improving their lands, 
builders of city homes and business blocks, and small manu- 
facturers. But stocks and bonds of corporations give a wide 
variety of investments which shade off from the safer or 
capitalistic type, to the more uncertain, or enterpriser's 
type. First-mortgage bonds, being a first claim on the income 
and property, have the highest security and yield generally 
the lowest interest. Even national bonds are not absolutely 
safe, and for that reason as well as because of their fluctua- 
tion in price, even their purchase has something of the nature 
of an enterprise. Stocks arc the ontorpriser's type of invest- 



286 



THE LAW OF PROFITS 



[CH. 31 



The enter- 
priser 's in- 
surance of 
the lender's 
capital 



The enter- 
priser's 
insurance 
of the 
laborer's 
production 



ment, the dividends being more uncertain, but giving the 
chance of a higher return than the average. It is because 
some stand ready to assume the risk of making goods yield 
average returns or more, that others can sit and enjoy a 
fixed income with little effort and in comparative security. 

2. The enterpriser gives up the certain income to he 
got by lending his own capital, and, becoming a borrower, 
offers his capital as insurance to the lender. Every business 
has an element of uncertainty in it, and some one must meet 
the risk. A man with marked ability as an organizer of 
industry is rarely found long without capital of his own. 
But even a penniless man who can gain the confidence of 
investors is able to get backing and to secure the necessary 
funds to engage in business. The lenders in such a case, 
however, run a greater risk than when the enterpriser is a 
man of some means, and they therefore ask a higher rate of 
interest than if they were loaning to a wealthy man or to 
a wealthy company. They are in part the enterprisers. 
AVhen, as usually, the enterpriser invests some of his own 
capital, it is a guarantee of his good faith, a sort of insurance 
reserve to protect the lender from loss. The first loss falls 
on the enterpriser, and the chance of loss to the lender is in 
large part, though not entirely, eliminated. It is charac- 
teristic of modern loans that the borrower may be rich, not 
poor,— often richer than the lender. The mortgage on real 
estate and the creditor's claim on a merchant's property 
usually give security of far greater value than the loan. 

3. The enterpriser gives to other workers a definite 
amount for services applied to distant ends. In discussing 
the wage system it was pointed out that most labor at the 
present time is put upon future goods. It is not known 
what they will be worth a month or a year later when they 
mature as consumption goods; their present worth can 
merely be estimated. If they prove to be worth little, the 
profits may be nothing or less than nothing. The enter- 
priser, however, buys the services for ready money, embodies 



ill] THE ENTERPRISER'S SERVICES REVIEWED 287 

them in goods, and assumes the risk; the goods may sell 
for more or less than the wages. It is sometimes said with a 
certain irony that if the enterpriser assumes the risk he is 
very careful to pay so little for labor that he does not lose. 
In this naive view the enterpriser is so independent of the 
market that he can pay much or little as he pleases. In fact 
in many eases he gains little, and in many he loses and 
Ic^es largely. 

4. The enterpriser risks his own services and accepts The risk of 
an indefinite chance instead of a definite amount for them, t^eenter- 

' . pnser's 

Assuming the risk for the right conduct of industry, he backs services 

himself, expresses his faith in himself as a manager who can 

make labor earn more than the prevailing wages and make 

capital yield more than the prevailing rate of interest. If 

it were otherwise, he would loan what capital he has instead 

of borrowing more; instead of employing others, he would 

himself seek employment in some other industry. Men are 

constantly shifting from the class of hired workers to that 

of enterprisers. It is a rude and often tragic process of 

adjustment and selection that enables men having ability as 

enterprisers to continue in that work, and forces others into 

the class of employees. 

5. The enterpriser is the economic buffer; economic Theenter-= 
forces are transmitted through him. In a more primitive jP^J^J^^/ 
industry each man is wage-earner, capitalist, and enter- diary in 
priser combined in one. As industry develops, some of ^'^^^^^^ 
the factors of cost become distinguishable, and relatively 

stable and calculable. A low rate of interest, ranging from 
three to four per cent., can be secured with practical cer- 
tainty by putting one's money into good corporation securi- 
ties, into the savings-bank, or into national bonds. Contract 
wages in each class of labor also are fixed by competition 
at a point where they are a medium or average of gains and 
losses. The enterpriser is the most movable element. As 
the specialized risk-taker, he is the spring or buffer, which 
takes up and distributes the strain of industry. He feels 



288 THE LAW OF PROFITS [CH. 31 

first the influence of changing conditions. If the prices of 
his products fall, the first loss comes upon him, and he avoids 
further loss as best he can by paying less for materials and 
labor. At such times the wage-earners look upon him as their 
evil genius, and usually blame him for lowering their wages, 
not the public for refusing to buy the product at the former 
high prices. Again, if prices rise, he gains from the increased 
value of the stock in his hand that has been produced at 
low cost. If the employer often appears to be a hard man, 
his disposition is the result of "natural selection." He is 
placed between the powerful, selfish forces of competition, and 
his economic survival is conditioned on vigilance, strength, 
and self-assertion. Weak generosity cannot endure. 
Fluctuation 6. Profits therefore fluctuate more from industry to in- 
of profits dustry and from man to man than do other incomes. As a 
somewhat exceptional case, small employers in industries such 
as baking and tailoring, may for long periods get less for 
their work than their employees get in wages. The pride in 
being an employer and occasional chances of greater gains 
perhaps explain the fact. The fluctuations of the market 
may sweep away from the enterpriser not only all his 
"profits," but all his accumulated wealth. As a conse- 
quence, profits may be at other times very high, for men will 
not take the risk of great losses unless there is a chance of 
large gains. While the income of the salaried man is oc- 
casionally advanced, and then for long periods remains 
unchanged, the profits of enterprise come in waves. In 
seasons of prosperity the income of the employer swells with 
a dramatic swiftness while rents and wages move tardily 
upward. But for years again the employer earns a return 
hardly exceeding a low interest on the capital invested in the 
enterprise, or runs the business for a time at a loss. Profits 
of this kind should not be spoken of as a percentage. 
Greater or less, they are the net result attributable to the 
enterpriser's skill, and bear no fixed or calculable relation 
to any capital investment. 



§111] STATEMENT OF THE LAW OF PROFITS 289 



§ m. STATEMENT OF THE LAW OF PROFITS 

1. Some apparent profits are due to antisocial or crim- Antisocial 
inal acts. Cheating, lying, breaking of contracts, bribery of orpseudo- 

profits 

public officials, and many similar acts may greatly increase 
individual incomes. These are not profits, as the term is 
here understood, but they are hard to distinguish from 
profits in practical life. One man gains a temporary success 
by acts that are later punished as crimes ; another, guilty of 
like deeds, escapes conviction for lack of evidence or on 
technicalities, and enjoys ill-gotten wealth. More fortunes, 
however, are due to actions on the border-line of ethics, 
which society is not yet honest enough to condemn or wise 
enough to prevent. No code of laws can be framed that will 
make possible the punishment of all antisocial acts. Any law 
that would catch all the guilty would injure many of the 
innocent. Economic analysis may exclude from the concept 
of profits the gains made by such means, but only om- 
niscience could distinguish them in every actual case from 
" swag and boodle." 

2. Some profits are the result of pure chance or lucTi. Chanceprof- 
What is luck? A result that is not calculable, coming to "^ 

pass in conditions where a rational choice is not possible, is 
called luck, for lack of another name. Now pure luck often 
brings temporary profit to the individual, but chance does 
not in the least account for the average and abiding profits. 
There is bad luck as well as good luck. According to the 
law of chance, in the tossing of a coin for " heads and tails," 
one side is as likely to come up as the other, and in the long 
run the number of heads and tails will be equal. Where 
cases are numerous, losses and gains distribute themselves 
about a general average, and may be eliminated l)y insurance, 
as that against fire, flood, lightning, against sickness of the 
employer, which would cripple the business, or against liis 
death, which would check it. But many factors evade all 

19 



290 



THE LAW OF PROFITS 



[CH. 31 



Profits due 
to a union 
of chance 
and choice 



SkiU the 
essential 
condition of 
continuing 
profits 



attempts to reduce them to rule, and chance remains a 
considerable factor in the success of many individuals. It 
still sometimes appears better to be born lucky than rich, 

3. Some profits are temporary gains from happy hut 
not entirely accidental choice of the best course. Many 
cases of profit said to be due to chance are found on closer 
knowledge to be due to superior judgment. A slight ad- 
vantage in choice will give now and then apparently chance 
gains. The adventurer who, on the discovery of gold, goes 
at once to California or to Alaska, may stumble upon a 
gold-mine. It is luck; but if he stays at home it is more 
likely, according to the theory of chances, that he will stum- 
ble over an ash-heap. In places where gold-mines are compa- 
ratively plentiful, one takes chances between a load of lead 
and a bag of money. Throughout life there is constant 
opportunity, but it must be sought. One who has the good 
judgment to be ever at the right time at the place where 
he has the best chance of stumbling upon a good thing, usu- 
ally gets the advantage, and men call it luck. The more the 
causes of success in general are studied, the larger is found 
the element of choice, the smaller that of luck. Some writers 
make these temporary gains the essence of profits. Con- 
sidering that profits are always due to the introduction of 
new and better methods, and not to the continued use of 
better ones, they argue that as the knowledge of these be- 
comes common property profits will disappear. But this in 
our view is a partial truth. 

4. Continuing profits arise from the continued exercise 
of superior judgment. After all the chance elements are 
taken into account, there remain differences in the abilities 
of men, and a continued and ever-renewed need of organiz- 
ing power. Profits, being recognized as due to these differ- 
ences in the abilities just as rent is due to differences in the 
fertility and efficiency of goods, have therefore been called 
differential gains. There would be no objection to the term 
were it not intended to emphasize a supposed difference be- 



5111] STATEMENT OF THE LAW OF PROFITS 291 

tween profits and rents on the one hand and interest and 
wages on the other. 

Some writers have so magnified the thought that the en- Risk of loss 
terpriser's function is to assume risk, as to make it a denial g^JJ*^^^^ 
of the view that profits are the earnings of ability. The 
risks of business are not those of the throwing of dice in 
which (if it is fair) skill plays no part, and gains in the 
long run offset losses. Business risks are rather those of 
the rope-walker in crossing Niagara ; the task is easily under- 
taken by the skilful Blondin, it is fatally dangerous to the 
man of unsteady nerve and limb. Profits are due not to 
risks, but to superior skill in taking risks. They are not 
subtracted from the gains of labor but are earned, in the 
same sense in which the wages of skilled labor are earned. 
So long as some men have better organizing ability than 
others, have better judgment, are better able to take the 
risks, there is reason to believe that profits will continue. 

Profits are the share, or income, of the enterpriser for his 
skill in directing industry and in assuming the risks. De- 
spite the complex influences, they are determined by his 
contribution to industry essentially as is the value of any 
skilled service. 



CHAPTER 32 

PROFIT-SHARING, PRODUCERS' AND CONSUMERS' 

COOPERATION 



Nature and 
definition of 
profit- 
sharing 



The pos- 
sibilities of 
profit- 
sharing 



§ I. PROFIT-SHARING 

1. Profit-sliaring is rewarding labor with a share of the 
profits in addition to contract wages. The essential mark of 
profit-sharing is that the additional payment depends on the 
net profits of the whole business at the end of the year. It 
is not to be confused with a free gift, or with special privi- 
leges granted by the employer, such as lunch-rooms, bath- 
rooms or houses at a low rent. Profit-sharing is a contract 
made in advance, not a free gift. Nor is it the same as a 
bonus or premium for a larger output, made contingent 
on the physical product, on the increased number of pieces 
turned out by the workmen, individually or in groups. 
Premium for output is given for something directly under 
the influence of the worker. The amount of profits is af- 
fected by the amount of output, but also by a number of 
other things that are quite outside the control of the work- 
men. 

2. The purpose of the employer in adopting profit-shar- 
ing is to stimidate the industry of the workers, thus reducing 
ivaste and cost of labor and supervision. The employer 
adopting the plan does not intend to lose by it; he believes 
that if he can get his workmen to take an interest in the 
business his costs will be reduced. He offers to divide with 
them the resulting savings. There is, in every factory, 
greater or less waste of materials, destruction of tools, and 

292 



§1] PROFIT-SHARING 293 

loss of time, that no rules or penalties can prevent. If the 
worker can be made to take a strong enough personal inter- 
est he will use care when the eye of the foreman is not 
upon him. The product also can be slightly increased in 
many ways by the workmen's exertions or suggestions. In 
some cases the quality of the work cannot be insured by the 
closest inspection as well as it can be by a small degree of 
personal interest. Either responsibility for the fault cannot 
be fixed, or the defect is one not measurable by any easily 
applied standard. Strikes are averted, good feeling is pro- 
moted, and contentment is furthered if the interest of the 
worker can be made to approach, and actually to be in 
harmony with, that of the employer. The economic result 
of the plan, if it can be made to work, must be to reduce 
the costs of these establishments below what they are. The 
crucial question is whether this alone insures that the costs 
will be less than those of competitors, thus giving a source 
out of which an increased amount, really a wage, can be paid 
to the laborer. This additional wage is made conditional 
on the employer's success in gaining a net profit on the 
year's business. 

3. The profit-sharing plan is now successfully working its suc- 
in over one hundred firms in America and Europe. The cesses and 

. . . failures 

plan was tried in Paris, in 1842, by Leclaire, a house-painter. 
In house-painting there is often a great waste of materials 
and time by men working singly or in small groups in differ- 
ent parts of the city. By this new method Leclaire enlisted 
the aid of the workmen, reduced the costs, and increased the 
profits. It is a remarkable fact that the plan has been con- 
tinued successfully by the same firm to the present time. 
The most important examples of profit-sharing in the United 
States are the Pillsbury ]\Iills in Minneapolis, Procter 
and Gamble's soap-factories at Ivorydale, 0., and the Nel- 
son ]\rfg. Co. at Leclaire, 111. In some cases both man- 
ufacturer and workman value the system highly. N. P. 
Oilman, the author of "Profit Sharing," puts the ratio of 



294 



PROFIT-SHARING AND COOPERATION 



[CH. 32 



Objections 
to and diffi- 
culties in 
profit- 
sharing in 
practice 



successes very high. Others declare that the failures are 
mostly lost sight of and are very many. The proportion of 
business done in this way is not large. One hundred firms 
is a very small fraction of one per cent, of the total number 
of firms in Germany, France, England, and America. A 
still more important fact is that this method of remuneration 
did not spread in the ten years preceding 1900. 

4. The failure of profit-sharing to grow is due to objec- 
tions on the side both of the employer and of the workman. 
On the side of the workman there is the bookkeeping diffi- 
culty. He is suspicious, and he lacks knowledge of the 
business. If at the end of the year the books show no 
profits, the workman loses confidence, considers the plan to 
be mere deception, and rejects it. Moreover, the plan puts 
a limitation upon the workman's freedom to compete for 
better wages by changing his place of work. It is almost 
indispensable to make length of service a condition to the 
sharing of profits. Workmen coming and going, working 
only a few months, cannot be allowed to share; the per- 
centage given to the others increases with length of employ- 
ment. Whenever men are thus practically subject to a fine 
(equal to the amount of shared profits) if they accept a 
better position, there is danger of a covert lowering of 
wages. The plan tends to break up the trade-unions, which 
is one of the reasons that the employers like it, and is the 
reason that organized labor opposes it. The employer on his 
part objects to the interference with his management, the 
troublesome inspection of the books, and the constant grum- 
bling and complaint of the workmen. It makes known the 
amount of his profits; if they are large, the advertising of 
his success invites competition; if they are small, publicity 
injures his credit and depresses the value of his property. 
In view of all these difficulties it is not surprising that while 
the plan often starts promisingly, it usually loses its effici- 
ency after a short trial. Business methods are severely 
subject to the principle of the survival of the fittest. 



§11] PRODUCERS' COOPERATION 295 

Through competition and the survival of the firms that 
adopt improvements, better methods must eventually sup- 
plant poorer ones. If a method fails to spread when it has 
been tried for fifty years and all are free to adopt it, there 
must be some defects inherent in it. That must be our 
conclusion as to profit-sharing. 

5. It is usually better to make wages depend on the Defective 
worker's efficiencij rather than on the profits of the whole profit- ^'^^ 
business. The strongest motive to efficiency is present when sharing 
reward is connected immediately and directly with effort, 
not with some result only slightly under the worker's con- 
trol. In profit-sharing the added share is only partially due 
to increased effort of the worker. Labor is but one of the 
groups of costs. Profits are the net result of many influ- 
ences. Chief among these is the wisdom of the enterpriser 
in planning and conducting the business. The "profits" 
may be nothing, though the worker may be exerting himself 
to the utmost. The plan is, therefore, reactionary, not in 
accord with the general progress of the wage system, which 
is tending constantly to centralize responsibility, to put the 
risk into the hands of competent managers, and to secure 
to the worker a definite amount in advance, as high as 
conditions make possible. The system of premiums, or bonus 
payments, for output, gives in most cases better results and 
is rapidly spreading. It is sounder in conception and works 
better in practice. This premium depends on the increase 
by the laborer of the output of his particular machine or pro- 
cess as compared with a standard based on the experience of 
some definite period. 

§ II. producers' cooperation 

1. Producers' cooperation is the union of workers in a Purpose of 
self -employing group to do away with any other enterpriser coopaation 
than themselves, and to secure for themselves the profits. 
Its object is not to do away with any return on the capital 



296 



PROFIT-SHARING AND COOPERATION 



[CH. 32 



Its limited 
success 



Its main 
difficulty 



investment. Capital may be borrowed either from outsiders 
or from the individual cooperators, and is paid a stipulated 
interest apart from the profits. The source of the gain is to 
be found in the saving of what the worker looks upon as the 
needless drain of profits into the pockets of the employer. 
The hope is that the enterpriser's function (if it is admitted 
that he has any useful function) will be performed by the 
workers collectively or through their representatives. They 
undertake to furnish brain as well as muscle, management 
as well as hand-work. The hope is even to increase the 
profits through increasing the stimulus to the workers and 
by saving in friction, disputes, and strikes. 

2. Practically the plan has been made to work in a com- 
paratively few simple industries. The most notable examples 
of successful cooperation in America have been the cooper- 
shops in Minneapolis. There were a simple problem of costs, 
few and uniform materials, patterns, and qualities of prod- 
uct, few machines and much hand-labor, simple well-known 
processes, a sure local market. Mr. Lloyd, in a recent book, 
describes many successful societies in England, but they 
are all of a simple sort of industry, as agriculture and dairy- 
farming. Within the whole field of industry, this method 
of organization makes little if any progress. Most experi- 
ments have failed and the successful ones often become 
ordinary stock companies with the most able men in control. 
Therefore, whether losing or making money, they nearly all 
cease to exist as cooperative enterprises. This result has dis- 
appointed the prophecies of many wise men of seventy-five 
years ago. In the time of John Stuart Mill, great expecta- 
tions were entertained of the future of productive coopera- 
tion, which was thought to be a solution of the whole social 
problem. 

3. The main difficidty in productive cooperation is to 
secure managing ability of a high order. There is no touch- 
stone for business talent, no way of selecting it with any 
certainty in advance of trial. This selection is made hard 



§11] PRODUCERS' COOPERATION 297 

in cooperative shops by the jealousies and rivalries, and 
by the politics among the workmen. A man thus selected 
by his fellows finds it almost impossible to enforce discipline. 
In cooperation there is occasionally developed good business 
ability that might have remained dormant under the wage 
system ; some workmen showing unusual capacity cease to be 
handicraftsmen. But the unwillingness on the part of the 
workers to pay high salaries results in the loss of able man- 
agers. Having demonstrated their ability, the leaders go 
to competing industries where their function is not in such 
bad repute, and where higher salaries can be earned; or 
they go into business independently, being able easily to get 
control of the necessary capital. 

4. Most cooperative schemes have suffered from a lack cooperators 
of good theory, an inability of the workers to see the im- J^gentw-"^ 
portance of the enterpriser's service. Most men make a pnser's 
very imperfect analysis of the productive process. They see ^°'^*^°'^ 
that a large part of the product does not go to the workmen; 
they see the gross amount going to the enterpriser, and they 
ignore the fact that this contains the cost of materials, interest 
on capital, and incidental expenses. They ignore further 
that the enterpriser's function is a productive and essential 
one. The theory of exploitation, or robbery, as explaining 
the employer's profits, is very commonly held in a more or 
less vague way by workmen. With a body of intelligent 
and thoroughly honest workmen, keenly alive to the truth, 
the dangers, and the risks of the enterprise, cooperation 
would be possible in many industries where now it is not. 
The producers' cooperative schemes usually stumble into an 
unsuspected pitfall. When a heedless and over-confident 
army ventures into an enemy's country without a knowledge 
of its geography, without a map, and without leaders that 
have been tested on the field of battle, the result can easily 
be foreseen. 



298 



PROFIT-SHARING AND COOPERATION 



tCH. 33 



Nature and 
kinds of 
consumers' 
cooperation 



Costliness 
of com- 
petitive 
mercantile 
business 



§ III, CONSUMERS ' COOPERATION 

1. Consumers' cooperation is the union of a number of 
buyers to save for themselves the profits of the merchants 
or agents. There are many classes of consumers' cooperation, 
but the chief ones are: (1) to sell goods (retail stores); 

(2) to provide insurance (cooperative insurance companies) ; 

(3) to provide credit or capital (cooperative banks). These 
are also productive enterprises, for the merchant 's work adds 
value to the goods, the insurance company and its agent 
do a real service, the profits of the small bank are, ordinar- 
ily, earned fairly under existing conditions. The terms pro- 
ducers' and consumers' cooperation merely set in contrast 
the part of the productive process that is undertaken. Pro- 
ducers' cooperation is concerned with the earlier steps, usu- 
ally stopping when the product is disposed of to wholesale 
or retail merchants. Consumers' cooperation (often called 
distributive cooperation) is concerned with the later steps, 
the placing of a consumption good (rarely also productive 
agents) into the hands of the final user. It imparts the 
same value to goods that the retail merchant does. The one 
thing this class of cooperators is sure of when they begin 
is a number of consumers to make use of the service or prod- 
ucts they purpose to supply ; hence the name. 

2. The waste of competitive mercantile business is the 
source from which it is expected that the savings of the 
cooperative enterprise will come. It is a great expense to 
the retail dealer to secure a body of customers. Rent of 
store-room, clerk hire, interest on invested capital are fixed 
charges, which can be met only on condition of a regular 
and frequent turnover of the stock. To attract customers 
the dealer must have a well-located store, must advertise, 
keep open long hours, and pay idle clerks. Frequently 
he must give credit, raising the price enough to cover 



5111] CONSUMERS' COOPEKATION 299 

the expense of bookkeeping, collection, bad accounts, 
and loss of interest. The public's likings, whims, lack 
of judgment, and lack of business analysis make these 
charges necessary. There are many communities where it 
would be impossible to carry on a cash business even at 
considerably lower prices. Customers are exacting and re- 
quire the costly delivery of small packages; tM'o horses and 
a driver must travel two miles to deliver a spool of thread 
or a half-dozen oranges. Frequent changes of fashion and 
the shifting of customers from one store to another keep the 
merchant always insecure in his trade. A number of buyers 
mutually agreeing to pay cash, to buy at certain times, to 
place all their orders with one store, to go to a cheaper 
location, down an alley or into a basement, can save much 
of this cost on one condition : that the management ap- 
proaches in its efficiency that of ordinary competitive busi- 
ness. In spite of all these advantages, if there is inefficient^ 
management the final cost will be no less than that of ordi- 
nary business. 

3. Despite the possil)ilities of saving, most cooperative The more 
stores fail through a lack of good managemeiit. Note first the successful 

' "^ ' ^ ... cooperative 

greater successes. Since 1844, from which time it dates, the stores 
cooperative-store movement has progressed steadily in Eng- 
land, where the scores of retail societies are federated and 
own large wholesale stores. The long experience has devel- 
oped good methods and a conservatism almost inconceivable 
to an American mind. They are practically great stock com- 
panies in which one can buy a share at a small cost and be- 
come a purchaser at usual prices, receiving a dividend later 
according to the amount of his purchases. Cooperative stores 
in American universities are generally successful, apparently 
because they don't cooperate. Some get into politics and go 
the way of the wicked. The survivors gravitate into the 
hands of a committee of the faculty, which tries to employ an 
efficient manager, and administers the business as a public 



300 



PROFIT-SHARING AND COOPERATION 



[CH. 32 



The failures 
and their 
causes 



Profit- 
sharing and 
cooperation 
in relation 
to the 
enterpriser 



trust without private profit. The wastefulness of multiply- 
ing orders for text-books to be used by a class whose number 
is definitely known in advance, and the comparatively uni- 
form character of the supplies, make economy peculiarly easy 
in this case. A large part of the services of the cooperative 
store, however, are indirect; it reduces and regulates the 
charges in the stores near by. 

Nearly all the Granger stores, started thirty years ago in 
great numbers, and most of the cooperative stores among 
American workmen, have failed. The failure is easily ex- 
plained by the ignorance of danger, by lack of harmony, by 
credit sales, and by inefficient management. The wastes of 
competitive business are partly a tax imposed upon men 
(taken collectively) by their lack of business method; the 
community is not intelligent enough, honest enough, or 
self-sacrificing enough to do business in the most economical 
way. Partly they are the price paid for variety and change, 
and for the cherished American right "to kick"— some- 
thing difficult for the members of a cooperative store to do 
without hurting themselves. 

4. The experience with these plans verifies the analysis 
of the enterpriser's function: pure profits are the earnings 
of a productive service. Comparing these three plans, they 
are seen to be alike in seeking to make workers share some of 
the profits, to change the destination to which profits would 
go. The first would create profits by the effort of the workers, 
and give them a part of the saving. The second would have 
collective workers perform the enterpriser's work in the 
factory and get his reward. The third would have collective 
buyers do the work of the merchant and save his profits and 
other costs. The last is the easiest to do. Profit-sharing is 
next in difficulty, and producers' cooperation is the hardest 
of all to put into practice. In some cases, under some con- 
ditions, the enterpriser's services may be more economically 
performed than at present, for the waste is great. But 
taking men as they are and things as they are, in most 



*ni] CONSUMERS' COOPERATION 301 

places the enterpriser's service is necessary and must be continued 
paid for. His contribution to the success of the industry enterpriser 
depends on his nature and ability, and it can be distinguished 
theoretically and practically from the contribution made by 
the Avorkmen. Nothing but changes in human nature, in ed- 
ucation, and in morality can diminish the necessity for his 
service. 



CHAPTER 33 
MONOPOLY PROFITS 



Difficulty of 
fixing the 
meaning of 
monopoly 



Monopoly is 
not merely 
scarcity 



§ I. NATURE OF MONOPOLY 

1. The term monopoly is used loosely and in many senses. 
In popular discussion monopoly means almost any wealthy 
corporation or the power the corporation possesses, a power 
which is usually thought of as oppressive. Even economists 
have held the vaguest ideas regarding monopoly. The recent 
rise of trusts and monopolies has given a large new body 
of facts bearing upon the subject, but all the resulting dis- 
cussion by the public and by economists has not brought 
agreement upon a definition entirely satisfactory. When 
usage has not settled upon any one meaning, the selection of 
a definition is in a measure arbitrary, though it may be 
guided by logic and considerations of expediency. Let us 
state the various meanings and indicate the one adopted in 
this discussion. 

2. Monopoly sJioidd not he used as synonymous with 
scarcity. Scarcity is the essential condition of all value. 
The simplest things— bricks, sand, the commonest unskilled 
labor— would have no value were there not a degree of 
scarcity relative to the wants that may be gratified. "Mo- 
nopoly," whatever else it means, always conveys the idea of 
some exceptional kind of scarcity, scarcity due in part to 
some source or cause not ordinarily present. It is a bad 
practice in definition to apply two words to one idea, leaving 
the other idea unnamed, as is done when monopoly is made 
synonymous with scarcity. Both words are needed. Such a 

302 



§1] NATURE OF MONOPOLY 303 

usage unfortunately is common in economic literature. 
Many economic writers, for example, have called land- 
ownership monopoly, saying that land being the work of 
nature cannot be increased by men, and therefore must 
always be scarce. Even if it were true that in the economic 
sense land could be produced by man, there still would be 
confusion here between a general class of goods and a 
special thing. The fact that a particular field cannot be 
duplicated does not make a monopoly of land as a whole, 
any more than the existence of desert land in Arizona makes 
land valueless or a free good. Nor is a land-owner a monopo- 
list any more than is the owner of a valuable machine. The 
owner of forty acres of land worth four hundred dollars, or 
the owner of a village lot worth a hundred dollars, can 
hardly be called a monopolist. It leads to absurdity to use 
the word monopoly with reference to landownership indis- 
criminately. Neither mere scarcity nor the limitation of 
natural stores should be called monopoly when ownership 
is scattered and combination between owners does not exist. 

3. The ability of superior material agerits and of skilled Monopoly is 
workers to secure higher returns than do poor ones does supeTior^ 
not constitute monopoly. The free competition assumed in economic 
abstract discussions of value, does not mean equal capacity ^^" 
or efficiency, but the legal freedom and personal willing- 
ness to move a productive agent into the highest industrial 
place it is capable of holding. The rocky fieid does not 
compete with the fertile one in the sense that it can yield 
the same uses. The field fit only for potatoes does not 
compete with those rare and favored localities that can 
raise the best wines. The gardener earning two dollars a day 
does not compete with the skilled physician with an income 
of twenty thousand dollars a year, for he has not the eco- 
nomic capacity to do so; but he is free to compete (as is the 
owner of the rocky field) unless law, caste, class legislation, 
social prejudice, or some other objective factor forbids. 
Anything, however, that prevents the labor or capital of 



304 



MONOPOLY PROFITS 



[CH. 33 



Monopoly 
consists in 
unified 
control 



Definition of 
monopoly 



buyers or sellers from application for which they are fitted, 
defeats free competition. To use the term monopoly of any 
and every limitation of economic ability is to extend it to 
every case of value. To use it of the high wages of skilled 
workmen, where no union to suppress competition exists 
among them, is to make it a colorless synonym of scarcity. 
It should be confined to a narrower and more exclusive use. 
Some special kinds of limitation should be connected with 
the idea of monopoly. 

4. The limitation connected with monopoly is not that of 
economic capacity hut that of ownership and control. The 
derivation of the word from the Greek points to the general 
thought : monos, alone, and poleo, to sell, a single seller, the 
sole source of supply in a given market. The term was first 
used in England of special grants or patents of monopoly 
from the crown to make or deal in specified articles, such as 
soap, candles, etc. The political power of the state created 
and defended the monopoly. This policy is pursued in a 
limited degree to-day for the encouragement of invention, 
in the granting of patents and copyrights. In the current 
definition, " The exclusive right, power, or privilege of 
dealing in some article or trading in some market," the 
term " dealing in " is well chosen, for it is broad enough to 
cover cases of buying as well as selling, and includes power 
derived from political as well as from other sources. But the 
term "exclusive" is too absolute, allows of no gradations, 
and makes the definition applicable only in the rarest cases. 

5. Monopoly is such, a degree of control over the supply 
of goods in a given market that a net gain will result to the 
seller if a portion is withheld. Every producer has control 
over some agents and some portion of the supply of prod- 
ucts; but ordinarily the portion controlled by any one is 
so small that withholding it entirely from sale would not 
cause the market price to rise in any appreciable degree. The 
producer in such a case regulates his action as if the market 
price were fixed beyond his control, and he uses his pro- 



§n] KINDS OF MONOPOLY 305 

ductive agents fully up to the point where costs equal price 
on the marginal unit of product. A skilled worker getting 
five dollars a day loses that sum every day he is idle. A 
landowner w^hose land can command a competitive rent of 
ten dollars an acre must take that sum or less, or nothing; 
he cannot get more. How can a net gain ever result from a Monopoly 
smaller sale? As a reduction of supply results in a higher g^ppiy 
price, it is possible, as is seen in the paradox of value, for 
a situation to arise in the case of some goods, where a smaller 
number of units yield a larger sum in the market than a 
larger number of units. But the seller's interest lies not in 
the increase of total sales, but in that of net gains. Net 
gains, being the product of the number of units sold mul- 
tiplied by the gain on each unit, increase at a much faster 
rate than do total sales. The existence of monopoly power 
in any degree depends therefore on several factors : the effect 
of contraction of supply in raising prices, the effect on costs, 
the number of units remaining in the ownership of the one 
contracting supply, and the possibility of preventing others 
from increasing supply later to profit by the higher prices. 

§ II. KINDS OF MONOPOLY 

1. Monopoly gets its power from political, economic, and The sources 
commercial sources. A political monopoly derives its power p^™g°°°^°'^ 
of control from a special grant from the government, forbid- 
ding others to engage in that business. The typical political 
monopoly is that conferred by a crown patent bestowing the 
exclusive right to carry on a certain business. A second 
kind is that conferred by a patent for invention, or the copy- 
right on books, the object of which is to stimulate invention, 
research, and writing by giving the full control and protec- 
tion of the government to the inventor and writer or their Political 
assignees. Tn this case the privilege is socially earned by the 
monopolist; it is not gotten for nothing. Moreover, the 
patent is limited in time, expires and becomes a social pos- 

20 



monopoly 



306 



MONOPOLY PROFITS 



[CH. 33 



Economic 
monopoly 



Commercial 
monopoly 



session, A third kind is a government monopoly for pur- 
poses of revenue. In France, the government controls the 
tobacco trade, and the high price charged for tobacco makes 
the monopoly yield a large income. A fourth kind are 
public franchises for public service, as street-railways, 
lights, gas, waterworks, etc. These are granted to private 
capitalists to induce them to invest capital in something 
which has public utility. 

Economic monopoly arises when the ownership of scarce 
natural agents, as mines, land, water-power, comes under the 
control of one man or one group of men who agree on a 
price. Economic monopoly is a result of private property 
that is undesigned by the government or by society. It is 
exceptional, considering the whole range of private property, 
but it is important. The oil-wells embracing the main sources 
of the world's supply have come under one control. One 
corporation may control so many of the richest iron-mines 
of the country as to be able to fix a price different from that 
which would result under competition. Coal-mines, espe- 
cially those of some peculiar and limited kind, such as 
anthracite, appear to become easily an object of monopoli- 
zation. Economic monopoly merges into political monopolies, 
such as patents and franchises. Private property is a polit- 
ical institution designed to further social welfare, and only 
rarely is any particular property a monopoly. Private con- 
trol of great natural resources doubtless would have been 
prohibited had it been foreseen. 

Commercial monopoly, variously called contractual, or- 
ganized, or capitalistic monopoly, arises where men unite 
their wealth to control a market, to overpower or intimidate 
opposition, and to keep out or limit competition by the mere 
magnitude of their wealth. These various kinds so merge 
into each other that they cannot always be distinguished in 
practice. A patent may help a capitalistic monopoly in 
getting control of a market; great wealth may enable 8- 
company to get control of rare natural resources. 



§11] KINDS OF MONOPOLY 307 

2. Monopolies may, for special purposes, he classified also Special 
as selling and buying, producing and trading, lasting and <=^*^^^^°* 
temporary, general and local. The terras selling and buying 
monopoly explain themselves, though the latter conflicts 

with the etymology. Under conditions of barter the selling 
and the buying monopoly would be the same thing in two 
aspects. A selling monopoly is by far the more common, 
but a buying monopoly may be connected with it. A large 
oil-refining corporation that sells most of the product may 
by various methods succeed in driving out the competitors 
who would buy the crude oil. It thus becomes practically 
the only outlet for the oil product, and the owners of the 
land thus must share their ownership with the buying 
monopoly by accepting, within certain limits, the price it 
fixes. The Hudson Bay Company, dealing in furs, had 
practically this sort of power in North America. Many in- 
stances can be found, yet, relatively to the selling monopolies, 
those of the buying kind are rare. A producing monopoly 
is one controlling the manufacture or the source of supply 
of an article; a trading monopoly is one controlling the 
avenues of commerce between the source and the consumers. 
Monopolies are lasting or temporary, according to the du- 
ration of control. By far the larger number are of the 
temporary sort, because high prices strongly stimulate ef- 
forts to develop other sources of supply. Yet the average 
profits of a monopoly may be large throughout a succession 
of periods of high and low prices. Monopolies are general 
or local, according to the extent of territory where their power 
is felt. At its maximum where transportation and other costs 
most effectually shut out competition, monopoly power shades 
off to zero on the border-line of competitive territory. 

3. Degrees of power to affect price result from varying Relativity 
extent of control; monopoly is a relative term. The term 0'™°"°?°'^ 
monopoly by its derivation has reference to a single seller; 

but there are other thoughts in the concept. Monopoly has 
reference also to the amount of the supply controlled. The 



308 



MONOPOLY PROFITS 



[CH. 33 



The test of 
monopoly 



frequent use of the adjectives partial, limited, and virtual 
are implied but usually superfluous recognitions of the rela- 
tive character of monopoly. Ownership of a particular 
knife, pencil, book, makes one the unique seller of it, but 
confers no monopoly power, as the power of substitution is 
practically absolute; the welfare of no one depends in any 
appreciable measure on that particular pencil. Ownership 
of an important fraction of an entire species of goods gives 
more power to affect value. One owning a large part of 
the desirable building sites or houses in town may gain by 
occasionally letting one stand vacant in order to drive better 
bargains with tenants. A trade-union may control most of 
the labor-supply of one kind in a town. But the test of 
monopoly is that a gain results from a higher price and fewer 
sales. It begins at the point where there is a motive to limit 
the supply in accordance with the paradox of value. The 
control of an entire species of goods gives price-fixing power, 
limited only by substitution of goods. Even though one 
person controlled all the coal and wood in any market, their 
prices still would be limited. If there were but one possible 
source of meat-supply, most people could live without meat. 
The monopoly of great species of goods can thus be seen 
gradually to merge from one grade into another. It is a 
matter of quality as well as quantity. There is more or less 
of it in the different industries, and, as noted in the pre- 
ceding paragraph, it varies over time and territory. 



III. THE FIXING OF A MONOPOLY PRICE 



Forces 
governing 
competitive 
prices 



1. A competitive producer gets the highest price that 
ivill permit him to dispose of his product. The enterpriser 
seeks to get the highest price for his product that the market 
will afford. His ability to continue making a profit at a 
lower price does not induce him to reduce the price unless 
the reduction is to his interest. The ordinary competing 
manufacturer is limited in his price by two things: first, 



§111] THE FIXING OF A MONOPOLY PRICE 309 

his customers may cease to buy such articles entirely and 
may substitute other goods if the price is too high ; secondly, 
they may buy of other sellers. Between his wish to keep 
the price up, and the customer's wish to buy as cheaply as 
he can, the price is fixed at a point where there is no 
inducement for others to come in and reduce his sales, or 
for him to seek a better market. There may be under these 
conditions a potential but very limited monopoly power. 
The sole druggist in a small town might occasionally get 
extortionate prices from particular customers in times of 
dire need, but he would thus drive away much of his custom, 
and would tempt a fairer and less grasping competitor to 
come in. Thus, when men and capital are free to come and 
go, there results an average or normal return for ability and 
agents of a certain grade. Prices come to equilibrium where 
each is selling his total product. 

2. iy/(ere a monopoly exists to a greater or less degree, Monopoly's 
there is less reason to fear loss of custom to competitors, floi^^^^ce 
The degree of control determines the fear of competitors. 
If the control is slight, a very small rise of price will bring 
in competitors. The monopoly profits in this case either 
must be very small or they will be very brief. Those outside, 
controlling a large supply, will be tempted by large profits 
to market it at once and to increase it as fast as possible. 
Even where a large part of the supply is under one control, 
the fear of substitution puts a limit on the price demanded. 
If the control were extended to all wealth, the monopolist 
would be the absolute despot of the lives of his fellows. 
But as things are, the mcmopolist aims, just as the competitor 
does, to get the price that gives the maximum gain. The 
monopolist, however, is in a more or less favored position, 
as he can raise his price considerably before losing the most 
of his customers. Much depends on whether the costs in- 
crease or decrease as output grows. Where a large increase 
in output greatly decreases the cost, lower price may leave 
a larger margin between the cost and the selling price. A 



310 



MONOPOLY PROFITS 



[CH. 33 



Discrimi- 
nating mo- 
nopoly rates 



Low rates 
to destroy 
competitors 



general monopoly price is therefore not an unlimited price. 
It is higher than the competitive price if the same cost of 
production is maintained. It may conceivably be lower than 
the former competitive price if the economies of combination 
greatly reduce the cost and justify a large increase of the 
output. 

3. A monopoly often seeks to avoid a general market 
pi'ice, and it adjusts its charge in each small ynarket sepa- 
rately. This is a most important aspect of the monopoly 
problem and a most important modification of the principle 
just stated. A market price is the expression of the least 
urgent demand that aids in carrying off a given supply. 
It is a maxim that there can be but one price at a time in 
a given market. The baker ordinarily sells the loaf at the 
same price to every one buying a given quantity. If he 
had a monopoly of the bread-supply, however, he might 
deal with each customer separately, ascertain, by personal 
inquiry into the lives of the citizens and by the aid of a 
force of detectives, just how much each could or would pay 
rather than do without bread. The policy of varying prices 
is thus followed by monopolies, though usually in a less 
inquisitorial way, to enable them to get the highest possible 
returns. Under the name of " charging what the traffic will 
bear," it is practiced by the railroads as local and personal 
discrimination. The endurance of some communities and of 
some individuals being greater than that of others, the 
burden is adjusted to the back, being made not as light but 
as heavy as each can be forced to bear. 

Large monopolies dealing in commodities use an adapta- 
tion of this method to kill of¥ small competitors who, within 
a certain district, sell at less than the monopoly price. Prices 
are suddenly reduced in that community below cost until, 
the small competitor being ruined, the monopoly rate is 
reestablished perhaps higher than before. Fear of suffer- 
ing a like fate prevents others from attempting competition 
even when prices offer a great attraction and give a high 
monopoly profit. 



§IU] 



THE FIXING OF A MONOPOLY PRICE 



311 



The profits of monopoly can be explained by the ordinary 
laws of value, yet evidently they form a peculiar economic 
and social problem. They appear to be due not to the ser- 
vices of the enterpriser in increasing production, but to his 
success in limiting it. There is, therefore, an antisocial ele- 
ment in them not found in the profits of ordinary industry. 
This deserves further and closer study. 



The source 
of monopo- 
listic 
profits 



CHAPTER 34 

GROWTH OF TRUSTS AND COMBINATIONS IN 
THE UNITED STATES 



EUstinctlon 
between 
large capital 



Large 
production 



And 

monopoly 



§ I. GROWTH OF LxVRGE INDUSTRY IN THE UNITED STATES 

1. In the discussion of the so-called trust problem three 
things must be distinguished: large individual capital, large 
production, and monopoly power. Capital, in the sense of 
valuable agents, is found in the smallest as well as the largest 
industry, and every owner, from the small shop-keeper to 
the wealthiest bondholder, is a capitalist. In popular dis- 
cussion, however, the word frequently implies great wealth 
in a single hand, though this wealth may be invested in a 
large number of small industries. Large production is the 
concentration of capital into large units of industry. The 
capital may be the same as before, the ownership may or 
may not be widely diffused, but the control and management 
are unified. Large factories may or may not have monopoly 
power; as factories grow in size, competition among them 
often becomes more, not less, complete and severe. On 
the contrary, monopoly, as before defined, may exist where 
the industry is small, as the waterworks in a small town, 
or a small factory for making patented articles. In periods 
of depression a business with a capital of ten thousand 
dollars may go on and prosper, while one with millions may 
be forced into bankruptcy. These three ideas— great indi- 
vidual wealth, large industry, and monopoly power— are 
often hopelessly confused in the discussion of present-day 
questions. 

312 



51] GROWTH OF LARGE INDUSTRY 313 

2. Three industrial stages may he broadly distinguished: stages of 
that of tools, that of machines and small factories, and that *°°is^°f 

' ' ' ' ' household 

of large production. Men are prone to forget that all the industries 
■world is not doing just as they are. Over two thirds of the 
people on the globe are still in the first industrial stage. One 
billion people use only tools, and have no better source and 
means of power than domestic animals. This is true in 
the most of Asia and Africa, in the greater part of South 
America, and in many portions of North America. About 
two hundred million people live in the stage of simple of simple 
machines and small factories. These are found in eastern ^^chmes 
and southern Europe, small portions of South America, some 
parts even of the United States. In this stage there is not 
enough manufacturing power in the community to supply 
much more than its own needs. About two hundred million 
people in the United States and western Europe have reached 
the third and highest industrial plane, where the highest 
mechanical devices are employed and industry becomes 
highly specialized. These differences are broadly stated; And of large 
there are contrasts within every nation. Three hundred "'^"^try 
miles from here, in the Alleghanies, people still can be found 
spinning and weaving and wearing homespun as in colonial 
days. In a trip of twenty miles in Tyrol or Switzerland 
one can observe every one of these industrial stages. The 
most striking development, if not the tj^jical form, in Amer- 
ica to-day is large or concentrated industry. 

3. In the last half century the unit of organization in Household 
leading industries has tended to grow larger. Seventy-five |°^^g'^<.a 
years ago a tool-using household industry, on farms and in 

homes where the greater part of the things used were pro- 
duced in the family, Avas still the typical organization in 
the United States. The early factories growing out of the 
household industry were small. A family specialized in pro- 
ducing cloth and exchanged with its neighbors; so with shoes, 
candles, soap, canned goods, cured meats, etc. Since that 
time two counter forces have been at work to affect the ratio 



314 



GROWTH OF TRUSTS AND COMBINATIONS [CH. 34 



Recent 
changes m 
number of 
factories 



Large 

production 
in some 
industries 



of manufacturing establishments to population. The number 
of establishments has been increased by specialization of 
farming which has called for many industries to produce 
the things once made on farms, and by increasing wealth 
and invention, which has made possible many small indus- 
tries supplying things before almost unknown. The number 
of establishments has been diminished as the staple products 
that can be transported have come to be made in larger 
factories. The resultant of these movements during the 
thirty years ending in 1900 is somewhat surprising : the ratio 
of factories (with an output worth five hundred dollars) to 
population has somewhat increased. In 1870 there were 
two hundred and fifty-two thousand establishments ; in 1890, 
three hundred and fifty-five thousand, and in 1900, five hun- 
dred and twelve thousand, a ratio to population of one to one 
hundred and sixty-two, one hundred and seventy-seven, and 
one hundred and forty-four respectively. The last date was 
one of great industrial prosperity, and doubtless many 
ephemeral enterprises had been called into existence, thus 
giving a somewhat abnormal result. Moreover, there has been 
a large increase in the number of things made in factories 
which were formerly made in the homes, and which then did 
not appear at all in the census of manufactures. 

In cotton-weaving, however, the unit of industry is grow- 
ing, factories in 1870 numbering nine hundred and fifty- 
six ; in 1890, nine hundred and five ; in 1900, one thousand 
and fifty-five, the later increase being due to the fact that 
many new factories in the South have been started in the 
last decade. The population meantime doubled. This move- 
ment has been going on for seventy years, there being about 
the same number of mills in 1900 as in 1830, though popula- 
tion had multiplied six-fold. Iron- and steel-mills numbered 
one thousand three hundred in 1880, one thousand in 1890, 
and nine hundred and sixty-five in 1900. In industries having 
local markets and sources of supply for materials, the change 
has been less rapid. There were twenty-four thousand grist- 
mills in 1880, eighteen thousand in 1890, and twenty-five 



§1] GROWTH OP LARGE INDUSTRY 315 

thousand in 1900, a change of ratio from two thousand one 
hundred to three thousand population per grist-mill. There 
were twenty-six thousand sawmills in 1880, twenty-two 
thousand in 1890, and thirty-three thousand in 1900, a 
change from about one thousand nine hundred and twenty to 
two thousand two hundred and seventy persons per sawmill. 

But while the number of establishments in these staple 
industries was decreasing, the number of employees per es- 
tablishment in most cases was increasing. The average in 
all industries, in 1870, was eight; in 1890, twelve; in 1900, 
ten and four tenths. In cotton-mills, in 1870, the average 
was one hundred and eighty-four ; in 1890, two hundred and 
forty-four; in 1900, two hundred and eighty-seven. The 
grist-mills, in 1880, had two and four tenths persons per 
establishment ; in 1890, three and four tenths. The sawmills, 
in 1880, averaged six employees each ; in 1890, fourteen ; 
iron- and steel-mills in 1880, one hundred and twenty-one 
each ; in 1890, one hundred and ninety-six. 

4. The amount of capital per estahlisliment is tending Growing 
to increase in the leading lines of industry. The amount of ^"j^'^^f'^^" 
capital is not so easy to determine as the number of em- capital into 
ployees, and it is recognized that the census figures on this ^^^g^^"*^"^ 
subject are only approximately correct. AVe are told that 
in cotton-mills, in 1830, the average capital invested was 
fifty thousand dollars; in 1890, nearly four hundred thou- 
sand dollars; in 1900, four hundred and forty thousand 
dollars. It is easy to observe the large increase in investment 
of capital in flouring-mills since the new processes came into 
use. The average capital of all industries does not grow 
as in the staple ones, for many smaller industries have come 
into existence. In 1880, the average capital was eleven thou- 
sand dollars; in 1900, it was eighteen thousand dollars. 

The years between 1890 and 1900 saw the rapid formation 
of tru.sts and combinations, and of larger industries. Consoli- 
dation took place on a great scale in railroads and in manu- 
factures. Much of this has been of such a kind that it does 
not appear at all in the figures showing the number of es- 



316 



GROWTH OF TRUSTS AND COMBINATIONS [CH. 34 



Recent 
formation 
of combina- 
tions 



tablishments and of employees. Many discrepancies appeal 
in the data regarding this movement given by different au- 
thorities, as there is no generally accepted rule by which to 
determine the selection of the companies to be included 
in the lists, and as the conditions are changing from day 
to day. A competent financial authority ^ gives the follow- 
ing figures regarding the "industrial" trusts (manufac- 
turing and commercial) and gas trusts, organized in the 
United States between 1860 and 1899, not including combi- 
nations in such businesses as banking, shipping, railroad 
transportation, etc. The figures refer to the reorganization 
and consolidation of industries into larger units, some of 
which have much and others little or no monopoly power. 



Decade 
1860-69 
1870-79 
1880-89 
1890-99 



Number Oi-ganized 

2 

4 

18 

157 



Total, 40 years 



181 



Total Nominal Capital 

$13,000,000 

135,000,000 

288,000,000 

3,150,000,000 

$3,586,000,000 



The number organized and the capital represented by this 
movement in the last of these decades are eight times as great 
as in the thirty years preceding. In the last ten years can 
be traced the influence of general industrial conditions. 



Year 


Number Organized 


Total Nominal Cap 


1890 


6 


$82,000,000 


1891 


13 


168,000,000 


1892 


13 


140,000,000 


1893 


5 


226,000,000 


1894 


2 


35,000,000 


1895 


7 


104,000,000 


1896 


3 


40,000,000 


1897 


6 


93,000,000 


1898 


22 


574,000,000 


1899 


80 
157 


1,688,000,000 


Total, 10 years 


$3,150,000,000 



1 Compiled from data given by "The Journal of Commerce and Com- 
mercial Bulletin," reprinted in " The Commercial Year Book," Vol. V, 
1900, pp. 564-569. 



§1] GROWTH OF LARGE INDUSTRY 317 

The first three years enjoyed great prosperity and the num- 
ber of combinations were six, thirteen, thirteen. In 1893, 
the number was less, but the total nominal capital (pre- 
ferred and common stocks and bonds) was still the greatest 
it had ever been in any year. Then came the period of 
depression, 1894-97, when both the numbers and the capital 
were comparatively small. Then followed the period of the 
greatest formation of trust companies the world has ever 
seen, which extended from 1898 to 1901, and ended in 1902. 

In a list recently revised by another authority ^ it appears Trust 
that the data for all " industrial trusts " (nearly, but not statistics 

^ "^ \ for 1904 

quite, comparable with the foregoing figures), are in round 
numbers as follows : 

Number of Plants 
Date Number Acquired or Controlled Total Nominal Capital 

Jan. 1, 1904 318 5288 $7,246,000,000 

These figures would indicate that the industrial trusts 
more than doubled within four years, most of the growth 
being within three years. The same authority, in a more 
comprehensive list, classifies in six groups all so-called 
"trusts" of the United States, at the date of January 1, 1904, 
as follows (the figures just given above are the totals of the 
first three groups) : 

No. of Plants Ac- 
quired or Controlled Total Nominal Capital 

1528 $2,660,000,000 

3426 4,055,000,000 



6. 



Groups 


Number 


Greater industrial 




trusts 


7 


Lesser industrial 




trusts 


298 


Other industrial 




trusts in process 




of reorganization 




or readjustment 


13 


Franchise trusts 


111 


Great steam rail- 




road groups 


6 


Allied independent 




railroad groups 


10 



334 528,000,000 

4. Franchise trusts 111 1336 3,735,000,000 



790 9,017,000,000 

250 380,000,000 



Total, 445 8664 $20,000,000,000 

1 John Moody, " The Truth About the Trusts," 1004. 



318 



GROWTH OP TRUSTS AND COMBINATIONS [CH. 34 



II. ADVANTAGES OF LARGE PRODUCTION 



Economical 
use of 
machinery 
in large 
production 



Economy in 
labor power 



1. A great technical advantage of large production is the 
better and fuller use of machinery. A large factory with a 
large output can keep a special machine adjusted for each 
pattern and process, whereas in a small factory much time 
and energy are wasted in adjusting one machine for various 
processes. The machinery in a large factory is thus more 
fully utilized. Compare the machinery used in a large ax- 
factory with that used in twenty-five small ax-factories 
having the same total output: the one hundred and fifty 
workmen in twenty-five small factories would use twenty- 
five shears, one hundred trip-hammers, fifty grindstone-pits, 
fifty polishing-frames, a total of two hundred and twenty- 
five machines; the same one hundred and fifty men in one 
large factory would require three shears, a saving of twenty- 
two; twenty trip-hammers, a saving of eighty; thirty-seven 
grindstone-pits, a saving of thirteen; thirty polishing- 
frames, a saving of twenty; a total of ninety machines, a 
saving of one hundred and thirty-five machines. The differ- 
ence in cost due to machinery is not so great as these figures 
indicate, as the unused machines last longer; but in the 
small factory there is more depreciation from rust and de- 
cay, and a larger proportionate investment of capital for 
w^hich interest must be earned. The average amount of 
stock and materials required in a large factory is not so 
great in proportion to the output. 

2. hi a large factory the division of labor may be more 
complete and effective. The technical economies of the divi- 
sion of labor can be realized in large measure only when a 
number of men work together. Partly because of the ad- 
vantages in the use of machinery, but partly from other 
causes, labor in a large group is proportionately more ef- 
fective than in a small group, especially in producing form- 
value. In making plows, nine men working separately will 



§UJ ADVANTAGES OF LAKGE PRODUCTION 319 

average sixty-six plows each per year, while one hundred and 
eighty men working together will average one hundred and 
ten each per year, the output per man being increased sixty- 
six and two thirds per cent. In a riHe-factory with a daily 
output of fifty, eight men are needed for the same product 
that can be supplied by three men in a factory with an out- 
put of one thousand daily. 

3. 7/1 the larger industry the costs of management, super- Misceiia- 

vision, and marketing are relatively less. Division of labor "f""^ . 
' t> a economies 

decreases the difficulty of supervision in larger factories, 
where the processes are divided, systematized, and made 
a matter of routine. The necessary inspection of the 
results is more rapid and easy. The advertising of cer- 
tain kinds of goods involves a large and inevitable 
outlay, which is relatively less for a larger business, as 
the greater the output the smaller the burden on each unit 
of the product. Combination efl'ects a great saving in the 
number of commercial travelers, a result partly due to the 
decrease in competition, but partly also to better organiza- 
tion. Each of twenty different factories must send its 
drummers into every part of the country to seek business. 
In combination they can divide the territory, visit every 
merchant and get larger orders at smaller cost. Supplies 
can be purchased more cheaply in large amounts, and ship- 
ments in car-load and train-load lots make possible special 
(sometimes illegal) concessions from railroads and from car- 
riers on waterways. 

4. There are some disadvantages in a large industry Limits to 
which put a limit to the growth of a single local establish- ^^\^^^^^ 
rnant. There is practically a limit to the advantages of size factory 

in a factory. When each man is working on the smallest 
possible subdivision of the product, doubling the number 
of employees will not increase his skill. When the finest 
machinery can be kept constantly in use, economy in its use 
has reached the maximum. As large factories tend to create 
cities around them, land rises in value and higher wages 



320 



GROWTH OF TRUSTS AND COMBINATIONS 



[CH. 34 



Do not 

necessarily 
limit con- 
solidation 



must be paid the workmen. Small factories are constantly 
seeking out lower rents, taxes, wages, salaries, cheaper local 
sources of materials, cheap though limited sources of power, 
and thus they compete successfully in many markets. The 
point is reached in the growth of establishments where over- 
sight cannot be as perfect and complete ; the eye of the 
master cannot be over all. The market that can be reached 
by one factory is limited by distance, as the cost of trans- 
portation finally offsets all the other advantages of large 
industry. 

It is evident that most of these reasons apply to a single 
local factory with far greater force than to a federation 
of locally scattered plants. It was once believed that the 
growing disadvantages of large industry would set an early 
limit to consolidation. While there is a truth in this thought 
not to be overlooked, the effects must now be recognized to 
be more distant than was supposed. The limits to the ad- 
vantages of combination have been removed by the ap- 
plication of the federative plan which makes possible under 
one management the maximum of advantages with the mini- 
mum of the disadvantages in large industry. That was the 
discovery of the early promoters of the trust movement. 



III. CAUSES OF INDUSTRIAL COMBINATIONS 



Trusts in 
the legal 
and the 
popular 
sense 



1. Trusts are large cornbinations of capital with some 
degree of monopoly power. The original, legal meaning of 
the term trust does not include the idea of monopoly. The 
old legal idea of a trust is the confidence imposed in a 
trustee. The method that was adopted by the early com- 
binations was the trust method, that is, they made use of 
this legal device : the stock of the separate companies was 
put into the hands of a board of trustees to whom was thus 
given the right to control. As it has been found possible 
to accomplish the same end without the use of this legal 
method, the popular meaning of the word trust, as applied to 



5 m] CAUSES OF INDUSTRIAL COMBINATIONS 321 

a monopoly, no longer agrees with the legal meaning. The 
word trust is popularly used of any large industry, though 
usually there is connected with it the idea of some evil power 
to raise prices to the consumers. A large number of the 
corporations called trusts have, however, little monopoly 
power, and some have none at all. They are simply large 
establishments. 

2. A strong reason for combination of competing plants Economies 
is found in the legitimate economies of large production. The °* combma- 
economies that are possible within a single factory may be 

still greater in a number of combined or federated industries. 
The cost of management, amount of stock carried, advertis- 
ing, cost of selling the product, may all be smaller per unit 
of product. A large aggregation can control credit better 
and escape loss from bad debts. By regulating and equal- 
izing the output in the different localities, it can run more 
nearly full time. Being acquainted with the entire situa- 
tion, it can reduce the friction. A strong combination has 
advantages in shipment. It can have a clearing-house for 
orders and ship from the nearest source of supply. The 
least efficient factories can be first closed when demand falls 
off. Factories can be specialized to produce that for which 
each is best fitted. The magnitude of the industry and its 
presence in different localities strengthens its influence with 
the railroads. Its political as well as its economic power is 
increased. 

A recent phase of corporate growth is the "integration integration 
of industry," that is, the grouping under one control of a of industry 
whole series of industries. One company may carry the 
iron ore through all the processes from the mine to the 
finished product. A railroad line across the continent owns 
its own steamers for shipping goods to Asia or Europe. 
Large wholesale houses own or control the output of entire 
factories. The possibilities in this direction have only begun 
to be realized. 

3. The men uniting to form a trust always declare that 

21 



322 



GROWTH OF TRUSTS AND COMBINATIONS [CH. 34 



Combina- 
tion 

prevents 
competition 



Financial 
gains of 
combination 



its formation is the necessary result of excessive competition. 
The statement is often true in the sense that a hard fight 
and lower prices have preceded the formation of the trust. 
But as this excessive competition usually is for the very pur- 
pose of forcing the combination, this explanation is a begging 
of the question. It is fallacious also in that it ignores the 
marginal principle in the problem of profits. Profits are 
never homogeneous from factory to factory, and to those 
that are on the margin competition may appear excessive. 
It is generally the largest and strongest factories, in the 
more favored situations, that, in order to get rid of trouble- 
some competitors, force the smaller, weaker, industries to 
come into the trust. When, therefore, it is said that com- 
petition is destructive, it may be a partial truth, but more 
likely it is a pleasantry reflecting the happy humor of the 
prosperous promoters of the combination. 

4. Another strong motive for the comhination is the 
profit to promoters and organizers. There are indirect as 
well as direct gains to the managers of a large business. 
There is the gain from the production and sale of goods 
to consumers, and there is the gain from the financial man- 
agement, from the rise and fall in the value of stock. The 
promoters of a combination often expect to make from sales 
to the investing public far more than from sales to the 
consumer of the product. A season of prosperity and con- 
fidence, when trusts and their enormous profits are con- 
stantly discussed, has an effect on the public mind like that 
of the discovery of a new El Dorado, a California, or a 
Klondike. Then is the time for the wily promoter to offer 
shares without limit to investors. 

These considerations show that the trust is not simple in 
its cause, nor in its nature. In a sense the most artificial of 
industrial arrangements, in another sense it is a natural 
evolution of industry. More and more it is being recognized 
that though it has in it something of evil, it has as well 
something of good, and certainly much of the inevitable. 



CHAPTER 35 
EFFECT OF TRUSTS ON PRICES 

§ I. HOW TRUSTS MIGHT AFFECT PRICES 

1. The economist's task, strictly confined, is to explain Economics 

tke relation of trusts to prices, not to solve the problem of o^thetmsi; 

. . . . problem 

tlieir political control. The question of trusts is such a large 

one that its discussion here must be confined to those aspects 
having" close relation to the central subject of economic 
study,— the laws of value. These laws were by the older 
economists thought to be true only within the limits of free 
competition. Seeing that in various ways this freedom is 
interfered with not only by caste, custom, organized labor, 
but by patents, political privileges, and the power of large 
aggregations of capital (in short by all things that check the 
flow of ability and of agents from one industry to another), 
the question occurs : Are the abstract laws of rents, profits, 
and wages of any significance or of any help in discussing 
the great practical questions of to-day? Are not prices de- 
lerinined by the personal whim of industrial despots who can 
bid defiance to the laws of price? The control of trusts by 
legislative action is largely a political problem, but it must 
be guided by a correct economic analysis. Proposed legis- 
lative measures often assume or imply that in no way, di- 
rectly or indirectly, is competition found in the problem. It 
should be the aim of economic study to make clear the true 
bearing and force of monopoly power in practical problems 
of value. 

2. TJie fundamental principles of market value cannot he 

323 



324 



EFFECT OF TRUSTS ON PRICES 



[CH. 35 



Limited 
power of 
trusts 



Monopoly 
and supply 



changed hy a trust; a selling monopoly can affect price only 
as it affects supply or demand. The strongest " trust " yet 
seen has not been omnipotent. Many careless expressions 
on the subject are heard even from ordinarily careful writers 
and speakers: "The trust can fix its own prices," "has 
unlimited control," " can determine what it will pay and for 
what it will sell." This implies that trusts are benevolent, 
seeing that the prices they charge are usually not far in 
excess of competitive prices in the past. Such a view over- 
looks the forces that limit the price a monopoly can charge. 
The law according to which the value of products on the 
market is determined, is as valid where there is a trust as 
anywhere else. The marginal utility of goods to the con- 
sumer determines the price of any given supply. If the 
supply remains the same, no trust can make the price go 
higher. What it gets in exchange are the services or the 
wealth of the rest of the public. At what rate can it ex- 
change its products for the products of others (including 
other trusts) ? The monopoly usually directs its efforts to 
affecting the supply, leaving the price to adjust itself. 
(This is the case of the selling monopoly; the statement must 
be adju.sted where it is a buying monopoly.) It can affect 
the supply either by lessening its own output or by intim- 
idating and forcing out its competitors. It is true that this 
logical order is not always the order of events. The trust 
does not first limit the supply, and then wait for prices to 
adjust themselves; it first raises its prices, but unless it is 
prepared to limit the supply in accordance Mnth the new 
resulting conditions of demand, such action would be vain. 
The control of the sources of supply is the logical explana- 
tion of the higher price, even though the limitation of supply 
is effected later by successive acts found necessary to main- 
tain the higher price. 

Monopoly price is therefore a rational thing, not a mystery 
entirely out of harmony with the simple law of value laid 
down for consumption goods. The trust works as the magi- 



§1] HOW TRUSTS MIGHT AFFECT PRICES 325 

cian does, not as was thought of old, in defiance of natural 
laws, but in harmony with them and by their aid. The 
view the public took of the trusts was at first medieval. 
That should not be the view to-day. 

3. The economies of large production after a successful Monopolistic 
combination may he divided in varyinq pronortions amona s^'°^^™™ 

^ -^ r- I J successful 

monopolists, tvorkmen, and consumers. If the great econ- combination 
omies of large production are effected by a new combination 
which makes no attempt to fix a higher price and limit pro- 
duction, where will the fruits of these economies go? They 
will go first to the owners of the trust, because, unless in- 
spired by motives of philanthropy, they have no need to 
lower prices. Though they are in possession of special facili- 
ties, they will try to secure as high a price as before. A 
wider margin permits greater profits on each unit without 
limiting the output or the sales. They may retain this so 
long as they do not yield to the temptation to increase the 
output in proportion to their new facilities. 

These economies, may, however, at times inure to the Gains to 
benefit of the workmen in higher wages if they succeed by ^^^ ^° 
any means whatever in squeezing the employers at this time 
of exceptional gains. The suggestion has even come from 
employers that in order to allay labor troubles there should 
be a union of capital and labor to squeeze the consumer, by 
doing away with all competition in fixing prices. This prop- 
osition to divide the plunder of monopoly has been viewed 
approvingly by some leaders of organized labor, but it does 
not look especially alluring to the general public, to which 
is assigned the humble part of paying the bill. 

Part of the advantages will go to the consumer whenever Gains to 
there is a motive on the part of the large establishment to 
increase supply in order to get a larger profit or to forestall 
new competition. As the improvements become matters of 
public knowledge, most of the new economic methods can 
and will be adopted by new enterprisers, and other large 
aggregations of capital will be induced to oome in to reap 



consumers 



326 



EFFECT OF TRUSTS ON PRICES 



[CH. b. 



Social 
burden of 
monopoly 
profits 



The praise 
and blame 
for trust 
prices 



the benefits. The effect, of course, is an increase in supply 
and a lowering of prices. The fiat of the trust to prices to 
remain fixed while supply increases is as vain as a mortal's 
commands to the waves to be still. The undesigned result 
of the economies of large production, therefore, where con- 
trol is not great, is to lower the prices and to diffuse the ben- 
efits among the public. 

4. // the trust succeeds in raising its prices it gains at 
the expense of the community. If a producer has some 
monopoly power, recognizes and uses it, his gain does not 
correspond with an increase in production. It is taken from 
those who buy these products, it is deducted from the psychic 
incomes of other members of society. This raising of prices 
actually reduces technical production, for the output is lim- 
ited in order to secure the higher price. The probably less 
urgent wants of the receivers of monopoly incomes are grat- 
ified in place of the probably more urgent wants of the 
average purchaser. The result is a decreased social income, 
with an increase of the inequality of distribution. There is 
an analogy here with the effects of trade-unions. If the 
trade-union succeeds in forcing prices higher than the com- 
petitive prices, it gains at the expense of the other portion 
of the community. But while its gains appear to be more 
largely at the expense of the richer elements of society, the 
gains of the trust are more likely at the expense of the 
poorer elements. If the success of organized labor means to 
some extent a leveling up of income, the success of the trust 
means a still further inequality. Hence a difference in 
public sympathy in the two cases. 

5. The responsibility for either the rise or the decline of 
trust prices cannot always he determined. Prices are chang- 
ing constantly under competitive conditions. In this active, 
moving world, changes of demand, the exhaustion of sources 
of supply, new processes, expiration of patents, opening up 
of new lines of transportation, affect prices in a multitude 
of ways entirely independent of organization. Trust-con- 



§11] HOW TRUSTS HAVE AFFECTED PRICES 327 

trolled industries are open to all these influences. Economic 
forces cannot be isolated as can elements in a chemical 
laboratory, and, therefore, trusts claim the credit for all 
the reductions of price that have occurred. By such a 
calculation the trusts usually make a showing of progress, as, 
until 1896, for twenty years the tendency of prices in most 
lines was downward. Always getting the highest price they 
can under the market conditions, they yet pose as benefac- 
tors. They would claim that the economies possible only 
under trust organization cause even a monopoly price to be 
less than a competitive price would be. Critics of the trusts, 
on the other hand, charge them with causing all the increase 
that occurs, and with checking the decline in prices. The 
critics compare the percentages of decline in price during the 
decades before and after the combination was formed, and 
as it is impossible for a geometric rate of decrease in price, 
as a result of improvements, to be long maintained, this 
showing is very unfavorable to the trusts. A method has 
been found, however, of testing, in the case of a few leading 
industries, the effects they have had on the price of their 
portion of the productive process. 

§ II. HOW TRUSTS HAVE AFFECTED PRICES 

1. Examination of the course of prices in the case of xmsts 
some notable trusts shows that, wherever effective, they '■^s^P^ces 
raise prices above the com,petitive rale possible to smaller 
production. The most instructive study in the subject is that 
undertaken by J. W. Jenks a number of years ago, and 
later developed by him when working with the Industrial 
Commission from 1898 to 1900. Its results are embodied in 
a series of charts. It appears that the price of refined petro- 
leum, in 1871, was twenty-five and seven tenths cents per 
gallon ; in 1880, eight and six tenths cents; in 1887, seven and 
eight tenths cents ; in 1900, seven and eight tenths cents. A 
writer in the " North American Review " claims that this 



328 



EFFECT OF TRUSTS ON PRICES 



[CH. 35 



The oil 
trust 



The sugar 
trust 



decline was due to the economies accomplished by the Stand- 
ard Oil Trust. It will be noticed, however, that prices fell 
most rapidly (from twenty-five and seven tenths cents to 
eight and six tenths cents) between 1871 to 1880, a period of 
intense competition, when the industry was new, and when 
the independent companies, fighting for their existence, intro- 
duced many improvements and began the construction of the 
pipe-lines that were later secured by the Standard Oil Co. 
Despite this rapid decline, the smaller companies still could 
have maintained a profitable business had it not been for the 
ruinous discrimination of the railroads against them. Be- 
cause of this, the Standard Oil Co., in 1880, obtained almost 
complete control. The price twenty years later than that 
date was less than a cent cheaper. In the meantime the price 
for a time continued to fall. Competition was never quite 
stilled. The small competitor, wherever he saw a chance, 
has nibbled off a bit of the tempting profits. The rise from 
1898 to 1900 was in accord with that occurring in other 
lines. A much lower cost of production is now possible to 
the great monopoly with its larger sales and more economical 
methods. The by-products, unknown at the beginning of the 
period, now yield large sums, yet the price remains much the 
same as a quarter of a century ago. The trust has suc- 
ceeded in retaining a large part of the increasing margin of 
price over cost. 

The influence of the sugar trust may be studied by what 
is known as the method of differentials. The differential in 
sugar is the difference between the cost of the raw sugar and 
the refined granulated sugar. Raw sugar is the main ma- 
terial and the principal fluctuating item of cost beyond the 
control of the trust. Changes in the differential reflect the 
changes in profits except as modified by a cheapening of 
the process. The period from 1880 to 1887 was one of great 
competition. In 1880, the differential was one and ninety- 
two hundredths cents on each pound of refined sugar, but 
it fell steadily till, in 1887, it had reached sixty-four hun- 



§IIJ HOW TRUSTS HAVE AFFECTED PRICES 329 

dredths cents. In the fall of that year the trust was formed ; 
and the next year the differential had risen to one and 
twenty-five hundredths cents, in 1889 to one and thirty-two 
hundredths cents. Tempted by the enormous profits, the rival 
retineries of Claus Spreckel were started, and with competi- 
tion the differential fell, in 1890, to seventy hundredths cents. 
The rival factories were then bought up and under the new 
combination the differential went sailing up to one and three 
hundredths in 1892, and to one and fifteen hundredths in 
1893. Rival factories again arose and competition grew 
stronger, reducing the differential to ninety-four hundredths 
in 1894. It was in that year that the firm of Arbuckle 
Brothers and Claus Doscher each opened a great refinery, . 
and in the next year the differential fell to fifty hundredths 
cents. In 1900, some agreement, the terms of which were 
unknown to the public, was entered into by the rivals and the 
differential had risen, in March, 1901, to ninety-five hun- 
dredths cents. In every case the differential fell when compe- 
tition was effective and went up when monopoly power was 
regained. 

The differential of steel-wire nails is the difference be- xhenaii 
tween the cost of the steel billets and the price of the wire. *™®* 
Between 1890 and 1895 there was a steady decline in the 
differential. In 1895 was formed the nail pool, an agreement 
to share the profits, a form of combination. A rapid advance 
took place, both in the price and in the differential. In 
the fall of 1896 the pool was broken and then occurred 
a fall in prices and in the differential during 1896-97. In 
January, 1899, the nail trust was formed, controlling sixty- 
five to ninety-five per cent, of the output of wire nails, and 
a rapid advance occurred in the price and also in the dif- 
ferential. 

The tin-plate industry practically had its origin in the The tin- 
United States, in 1892, under the McKinley tariff. As com- Pi^tet™«t 
petition increased, prices and the differential fluctuated and 
declined. At the end of 1898 the tin-plate company was 



330 



EFFECT OF TRUSTS ON PRICES 



[OH. 35 



formed and prices at once started upward with a rapir 
increase in the differential. Cause may, in a measure, bt 
mistaken here for effect. In these cases the part of the rise 
in price due to the rise of materials is not brought about by 
the trust. The differential represents its part of the pro- 
ductive process and its source of profits. The power to make 
the differential high is due in part to the general conditions 
of business in the last three years considered. The profits 
of all industries in those years increased. While prices may 
have risen partly because the trust was formed, it may have 
been possible to form the trust because prices were 
rising. The general conclusion is that trust prices are always 
raised when, and to the extent that, control is secured. They 
are lowered below normal prices when competition becomes 
troublesome. Fluctuation of prices probably has been more 
rapid and more spasmodic under trusts than it has been 
under ordinary competitive conditions. 
Effective 2. A large degree of monopoly control may lower the 

trustsinjure {^^Q^Qg q/ producers of materials, the value of competitive 

Vfl.T10US 

plants, and prices in special local markets. A strong sell- 
ing monopoly tends to become also a buying monopoly. A 
great industry using great quantities of materials may either 
own the sources or purchase from small producers. The 
steel trust owns mines, and ships and railroads to bring the 
ore to the furnaces; but the tobacco trust buys from the 
farmers. If the packing, refining, and marketing of a 
product is monopolized, the sellers of the raw or partly fin- 
ished product are subject to one-sided competition. The 
small producers of tobacco, of crude oil, and of anthracite 
coal claim that the effect of the trusts is to give them lower 
prices for their products. Some have been severely punished 
by the monopolies for refusing to take the first offer made. 
Monopoly is thus likewise able to purchase competing plants 
at ridiculously small sums, by first making them valueless 
through fierce price-cutting, or by threats of it. " Rich " is 
often a relative term, and it is said that many a small mil- 



producers 



§11] HOW TRUSTS HAVE AFFECTED PRICES 331 

Jionaire producer has anxiously waited to see whether the 
great trust would next turn its attention to him. 

3. Competition of less capable producers works in most Theper- 
cases to prevent the great or continued rise of trust prices, sistenceof 
Early trusts overestimated their power. The persistence of reducing 
competition in industries where the trusts have had great p"*^^^ 
advantages in position and resources has been astonishing. 
The wall-paper trust, though for many years it kept prices 
above competitive rates, was repeatedly undermined by 
competition. The whisky trust, while it frequently raised 
prices, was as often forced by the growth of small distil- 
leries to lower them below competitive rates. Competition 
in the oil industry has persisted under the greatest difficul- 
ties. The smaller companies have hauled the product by 
wagon when the trust was moving it by pipe-lines. The 
continuance of high prices by a trust depends on a high 
degree of control of supply. A recognition of the limits of 
their power has led trusts in some cases to a policy of 
moderate prices, affording a good profit, but not encour- 
aging competition. 

The limits of the power of the trust to control prices are supply as 
strikingly shown by the fact that it cannot even insure the<;on- 

, '^ , '' . . ditionoflow 

low prices if the market conditions do not justify them. The prices 
steel trust, in 1902-3, declared that it would not advance 
the price of steel rails above twenty-eight dollars, and this 
was hailed as a beneficent effect of trust control, which, by 
equalizing production, could prevent excessive fluctuations 
of price. But the trust's declaration was a bit of inexpensive 
humor on the part of the managers ; the trust had nothing to 
sell at the price quoted, as its entire product had been sold 
out months in advance. While, therefore, the trust contin- 
ued calmly to quote steel rails at twenty-eight dollars, com- 
petition raised the market price to thirty-three dollars a ton; 
twenty-eight dollars or more was paid for second-hand rails, 
and a proportionate price for other iron products. Such 
exceptional conditions, raising prices to abnormal levels, are 



332 



EFFECT OF TRUSTS ON PRICES 



[CH. 35 



Modes of 

controlling 

trusts 



followed by a decline disastrous not only to the small pro- 
ducer, but to the trusts as well. 

4. The control of the trusts must he sought in the direc- 
tion of maintaining potential competition through fair and 
free conditions of industry. Many of the remedies suggested 
are reactionary and would give up the benefits of large 
production. Measures must be sought in harmony with the 
economic principles of price. Since many of the trusts have 
grown wealthy by special shipping privileges from the great 
quasi-public corporations, the railroads, and by special fa- 
vors from public or corporation officers, who have been false 
to their duties, the solution must be a political and moral 
one ; it must be sought in the development of honest citizen- 
ship and of a more efficient social regulation of quasi-public 
industries. The conditions of competition may be made 
fairer by requiring publicity of accounts, and by making it 
impossible for great corporations to strangle their local com- 
petitors by special and temporary prices. The state here 
has the same duty to perform that it has to protect the weak 
man from personal violence at the hands of the strong. 
This will not prevent competition, but it will determine the 
ways in which the rivalries of men can be manifested. Any 
measures for controlling the great combinations must start 
from a right understanding of the law of value, neither un- 
derestimating nor overestimating their economic power. 
Public sentiment toward the trust question has changed 
somewhat in recent years, because the nature of trusts and 
the extent of their power are better understood. There is 
now less fear of them, and more confidence that they can be 
tamed and made to serve the welfare of society. 



CHAPTER 36 

GAMBLING, SPECULATION, AND PROMOTERS' 

PROFITS 

§ I. GAMBLING VS. INSURANCE 

1. Many forms of chance are inseparable from the hidi- unavoidable 
vidual enterprise. There are what may be called natural ^^^^'^^^ 
chances, arising from the uncertainties of the seasons, from 
rainfall, heat, hail, storm, flood, lightning, land-slides. Such 
chances must be taken both by the small enterpriser and by 
the large. In an earlier condition of society natural chance 
almost dominated industry, and it still remains and must 
always remain an important factor to deal with. There are 
political chances, as war and riot ; as legislation on money, 
tariffs, credit, and business relations. These are caused, it 
is true, by the action of men, but it is a collective action out 
of the control, to a greater or less degree, of the individual 
— absolutely out of the control of most individuals. Men of 
greater political influence can to some extent control these 
chances, possibly in their own favor. There are chances of 
carelessness causing fire, explosions, wrecks on misplaced 
switches, and involving penalties and losses that must be met. 
There is the chance of physical or mental collapse, as the 
sudden insanity or the sudden death, unforeseen and un- 
preventable, of one performing responsible duties. Sickness 
often wrecks the plans and the fortune of a whole family. 
There are economic changes, such as those in methods of pro- 
duction, in machinery, in methods of transportation; such as 
the growth of fashions or the growth of population changing 
demand in some directions and for some materials. 

333 



334 



GAMBLING AND SPECULATIVE PROFITS 



ICH. 36 



Average of 
chances in 
each 
industry 



Other 

chances 
artificial 
and 
avoidable 



Some of these chances are more connected with money- 
lending, others with manufacturing; some with agriculture, 
others with commerce; but all are present in some degree in 
every industry. In the broadest view they are not chances, 
for on the basis of experience it can be foretold that they will 
occur to some one ; but no individual can tell when and how 
they will occur to him. A general average of chances in dif- 
ferent lines of business causes some to be called safe, others 
extra-hazardous. The chance is averaged and added to the 
profit or gain of that industry, for an extra-hazardous indus- 
try must in general afford a higher average of profit in order 
to induce men to engage in it. It is folly to take a risk with- 
out ascertaining its degree, so far as general experience 
enables one to choose. But inasmuch and in as far as the 
gains and losses fall unequally upon different individuals, 
income depends on chance. 

2, The essence of gamhling is the attempt to gain by 
taking chances that are not the unavoidable incide^its of 
productive enterprise. The chances just enumerated are not 
sought, but avoided as far as possible; yet they must be 
borne by some one, and the burden must be distributed 
throughout society. There are unquestionably many kinds 
of chance-taking which differ from these in economic, and 
therefore in moral quality ; but it has taxed the ingenuity of 
philosophers to lay down an abstract definition of gam- 
bling that would permit ready and certain distinction in 
practice between gambling and legitimate chance-taking. 
Typical gambling is the transfer of wealth on the outcome 
of events absolutely unpredictable, so far as the two gam- 
blers are concerned. Examples are the shaking of unloaded 
dice or the honest dealing of a pack of cards. There can be 
no doubt of the entire lack of a productive economic basis 
in the betting on prices carried on in so-called bucket-shops 
by ignorant persons having no connection with the market 
of real things, and seeking to get something for nothing as 
a result of mere chance. 



5 1] GAMBLING VS. INSURANCE 335 



Cheating is not a necessary mark of gambling, although cheating 
the cruder kinds of dishonesty, such as the loading of dice or ^""^ ,,. 

" ^ gambling 

the collusion of horse-owners or of horse-jockeys to deceive 
the betting public, are so common that they seem often to be 
its essential feature. Gamblers recognize fair as opposed to 
unfair methods. Fair gambling is a kind of minor morality 
Avithiu the immoral field of gambling, like the honor found 
among thieves. Gambling bears somewhat the same relation 
to legitimate chance-taking that play does to labor. The 
chance-taking in gambling has no useful purpose or result 
outside itself. The gamblers constitute themselves a little 
fictitious economic circle, and they transfer gains and losses 
on the turn of events that have no practical objective result 
within their circle except to determine the direction of the 
transfer. 

3. Legitimate forms of chance, or risk-taking , sJiade off various 
into illeaitimate forms, or qambling. Ranging between the cases of a 

^ ' ' ^ -' . mixed na- 

cxtremes of legitimate risk-taking and of gambling are a ture; par- 
number of cases of a mixed nature. The bets made on tisanbets 
college games, races, and contests differ from ordinary bets 
only in the added feature of so-called college loyalty (a 
travesty on the real sentiment). These college gambling 
contracts are supposed (according to a mode of reasoning 
found also among primitive peoples) to exercise a subtle and 
irresistible influence upon the result. A crew that enters 
the race with the odds against it is unnerved and undone, 
thinks the patriotic collegian. 

In nearly all wagers, judgment in some degree influences Knowledge 
the choice of sides. One man bets on a horse whose pedigree ^J^^'^^^g 
and performances he knows thoroughly, anotluM- judges by the result 
the horse's appearance as it comes upon the track. The 
professional book-makers have the latest j^ossible and most 
exact information on which to base their bids. 

In the bets made on one's own prowess, as on speed 
in running or rowing, or in playing cards (wherein also the 
element of pure chance is mingled) the chance-taking is 



336 



GAMBLING AND SPECULATIVE PROFITS 



[CH. 36 



Gambling 
an economic 
loss to 
society 



still far over on the uneconomic side of the border-line. The 
running is for the sake of the wager, not for a useful pur- 
pose. A premium won by a runner for speed in delivering 
a message of economic importance is in striking contrast 
to the winnings in a wager. 

Finally, the very border-line of difficulty is reached in the 
purchase and sale of goods in the market with a view of 
profiting by chance changes in price. Land speculation, the 
purchasing and holding of lumber, grain, cattle, and other 
tangible and useful things, must be judged liberally. The 
quality of gambling depends somewhat on the motive as 
well as on the ability of the actor. The enterpriser dealing 
with real wealth, and fitted to take the risks, both because 
of his resources and of his exceptional knowledge, needs the 
motive of gain, and in a sense can be said to earn socially 
what he gets. The motive of the uninformed must be a blind 
trust in luck, and a hope to gain from a rise in prices which 
they are quite unable to foresee or rationally to explain. 

4. In its relation to value, a het, or wager, is the exchange 
of the chance of loss for the chance of gain, involving a 
social loss. Even when fairest, the average results of 
such an exchange must be unfavorable to society. One 
person loses a part of his income that gratifies relatively 
urgent wants ; another gains something that gratifies only 
less urgent wants than were represented by the sum he 
risked. The area that is subtracted from the loser's psychic 
income is larger than the area added to the winner's psychic 
income. The result would be different on the impossible 
condition that it were always the poorer man that gained 
and the richer one that lost. Betting, then, does not produce 
wealth ; it merely transfers ownership in a way that reduces 
the total want-gratifying power of wealth. 

The effects that gambling and betting have upon charac- 
ter are still more important and dangerous than their effects 
upon income. Motives of economic activity are reduced ; 
energy is diverted from productive enterprise ; society is 



§IJ GAMBLING VS. INSURANCE 337 

demoralized through dishonesty of men intoxicated by gam- 
bling; speculation and embezzlement occur; and there is a 
reduction both of production and of enjoyment in society. 
These things can be reasoned out with mathematical cer- 
tainty by means of the law of marginal utilit3^ 

5. Insurance is, in outer form, a het; hut its essential insurance 
purpose is the useful one of equalizing and eliminating ^^^^^e" 
chance. In its early form insurance was a bet made by a 
ship-owner to protect his cargo from loss. The chance of 
loss in shipping was even greater in the Middle Ages than 
now, and it became customary for the ship-owner to bet with 
a wealthy man that the ship would not return. If it did 
come back, the owner could afford to pay the bet; if it did 
not, he won his bet and thus recovered a part of his loss. It 
was what is called to-day " a hedge," that is, one bet made 
to neutralize, or offset, another. This gave to the smaller 
merchant the advantage of distributing his losses over a 
number of voyages, as was done by the owner of many vessels. 
Antonio, the wealthy merchant, is made thus to express his 
security : 

" My ventures are not in one bottom trusted 
Nor to one place ; uor is my whole estate 
Upon the fortune of this present year. 
Therefore my merchandise makes me not sad." 

Gradually there came about a specialization of risk-taking 
by the men most able to bear it. They could tell by ex- 
perience about what was the degree of uncertainty, and 
cniild lay their wagers accordingly. When several insurers 
were in the same business, competition forced them to insure 
the vessel and cargo of the ordinary trader for something 
near the percentage of risk involved. The insurance thus 
tended to become a mutual protection to the ship-owners; 
what had to be paid in premiums to cover risk came to be 
counted as part of the cost of canying on that business. 
Modern insurance is mutual in nearly every case: the total 

22 



338 



GAMBLING AND SPECULATIVE PROFITS 



[CH. 3a 



Insurance 
as mutual 
protection 



Conditions 
of sound 
insurance 



premiums equal the total losses plus operating expenses, the 
interest on the reserve of premiums counting as part of the 
premium. Each one gets protection for the loss of his 
property in return for the payment of a sum that will 
cover the losses on others' property. Such an exchange is 
a profitable one. The premium comes from marginal in- 
come ; the loss of house or property would fall upon the parts 
of income having higher marginal utility. The less urgent 
wants of the present are sacrificed in order to protect the 
income that gratifies the more urgent wants of the future. 
In insurance each party gives a smaller utility for a greater; 
each has a margin of advantage ; while the greater certainty 
in business stimulates effort and rewards it. This is quite 
the opposite of the working of betting and gambling. 

6. To he economically sound, insurance must have to 
do with real productive agents, and with somewhat regular, 
ascertainable events heyond the control of the insured. The 
difficulties that arise in case of fire-insurance are due largely 
to the failure to meet these requirements. When the insured 
sets fire to his own buildings, fire insurance ceases to be a 
legitimate thing. Constant efforts are made by insurance 
companies to guard against these " moral risks," the least 
calculable of any. Merchants whose stocks have been mys- 
teriously burned two or three times find difficulty in getting 
insured. In life-insurance it was the custom formerly to 
refuse to pay death-losses in case of suicide; but now that 
condition is attached only for the first two or three years. 
It being reasonable to suppose that no man would plan 
suicide years in advance, death by one's own hand some 
years after taking life-insurance is regarded as coming under 
the ordinary rule of chance. 



§ II. THE SPECULATOR AS A RISK-TAKER 



1. Every enterpriser is to some extent specializing as a 
risk-taker. This familiar idea may be taken as a starting 



§11] 



THE SPECULATOR AS A RISK-TAKER 



}39 



point in discussing speculation. In its broadest sense spec- An element 
ulation means to look into things, to examine attentively, o^^pecuia- 

_ ' _ *' ' tion in all 

study deeply, contemplate, meditate. In a business sense business 
the speculator is one who studies carefully the conditions 
and the chances of a change of prices; hence arises the 
thought that speculation is connected with chance. The 
enterpriser can estimate these chances better than most men. 
He stands on a hilltop sweeping the horizon, and can see 
farther than the workingman can. He relieves the other 
agents of part of the risk, and he insures both laborer and 
capitalist against future fluctuations of prices. Some of the 
profits of successful enterprise in countries where no system 
of regular insurance has grown up, and in certain lines here 
where no insurance is possible, are speculative gains of this 
sort. Offsetting them, however, in large measure, are the 
speculative losses, by which in many cases the investment 
has been swept away altogether. The cautious business man 
tries, to reduce chance as much as possible by insurance, and 
to confine his thought and worry to the parts of the produc- 
tive process where his ability counts in the result. The 
wise have found out that it is better to shift the risk to some 
specialist who can take it better than they. For a man who 
has his thought and effort concentrated on running a flour- 
mill, it is foolish to take the risks of fire, of loss in shipment, 
of a rise in the price of grain needed to fill outstanding 
orders— it is as foolish as it would be for him to make his 
own machinery. Insurance being the economical way to 
cover risk, the reckless will, in the long run, be eliminated 
from the ranks of enterprisers. 

2. In some lines the risk of marketing and carrying large speciaiiza- 
stocks becomes highly specialized, so that ordinary enter- ^^^^^i^^^ 
prisers shift it to a small group of risk-takers. In buying and 
selling large quantities of produce there is required the 
closest and most exclusive attention of a small group of 
men. The marketing of some staple products requires the 
most minute acquaintance with world conditions. To fore- 



3-iO 



GAMBLING AND SPECULATIVE PROFITS 



[CH. 36 



Produce 
speculators 
as insurers 



tell the price of wheat one must know the rainfall in India, 
the condition of the crop in Argentina, must be in touch as 
nearly as possible with every unit of supply that will come 
into the market. Such knowledge is sought by the great 
produce speculators in the central markets. If all means 
of communication— telegraph, cables, mails— are open to 
all, competition among these speculators becomes intense, and 
the result is the extremest efficiency. Their survival depends 
on the development of acute insight into market conditions. 
It is the testimony of expert witnesses and of writers in the 
report of the Industrial Commission that the margin at 
which farm produce is sold has fallen greatly in the last 
few years. These products are marketed along the lines of 
the least resistance, that is, of the greatest economy. The 
function of the commercial specialists is to foresee the 
markets, and to ship to the best place, at the right time, in 
the right quantities. If a product shipped to Liverpool 
will, by the time it arrives there, be worth more in Ham- 
burg, there is a loss. Such difficult decisions can be made 
best by a small group of men selected by competition. When 
handling actual products they perform a real economic 
service. 

3. Even some mere speculators on the produce markets 
may and do at times perform a, productive service as risk- 
takers. Many of the speculators in staples, wheat, corn, 
wool, rarely handle the material things, the real products. 
They make it their business to study the world conditions, to 
foresee prices, and in a sense to bet upon them. Regular 
merchants buy and sell fictitious products of these men 
AVhen a miller buys ten thousand bushels of wheat that will 
remain in the mill three months before they are marketed 
as actual flour, he at the same time sells that number of 
bushels to a speculator for future delivery; or selling flour 
for future delivery the miller buys a future in wheat. In 
either case he cancels the chance of loss or gain, giving up 
the chance of profit in the rise of wheat in exchange for 



§11] THE SPECULATOR AS A RISK-TAKER 341 

protection from the loss of the product on his hands. To source of 
him this is legitimate insurance, for he is striving not to '^S'ti^^te 

.,..,.,, 1-11 speculators' 

create an artmcial risk, but like the medieval ship-owners, gain 
to neutralize one that is inseparable from the ordinary con- 
ditions of his business. 

One may ask. How, if the miller in the long run benefits, 
can the speculator gain ? He does not intend to perform this 
service for nothing. Yet as the sales in the whole market 
equal the purchases, some say that there can be no profits to 
the speculator. There are unsuccessful speculators and at 
any rate their losses go to the successful as a sort of gambling 
profit. Speculators do not dine entirely on " lambs "; they 
are anthropophagous. But, further, the sales to legitimate 
purchasers should net a gain to the abler speculator. In 
proportion as his estimates are correct, there will remain 
a regular slight margin of profit to him. If he agrees to 
sell wheat at eighty-five cents to be delivered in three 
months, he expects it to be a little less at that time. In the 
long run the ablest speculator probably buys at a little less 
and sells at a little more than the price really proves to be. 
This means that the merchants in the long run pay some- 
thing for protection against changes in prices, just as they 
pay something for insurance. And yet this is the cheapest 
way to eliminate risk, and a man engaged on a large scale 
in milling is, it is said, at a disadvantage if he neglects this 
method of marginal buying. 

4. The huying of margins hy the " lamhs " is simple ignorant 
hetting, and much manipulation of the market is disJionest. ^^^^^' 
What has just been described is the more legitimate phase speculation 
of marginal buying, not its darker aspect. One who, having 
no special opportunities to know the market, buys or sells 
wheat, or other commodities or securities, on margin, is 
called a lamb. lie is simply betting. He has no unusual 
skill ; he cannot foresee the result. Tlie commission paid to 
brokers "loads the dice" slightly; the opportunities of the 
larger dealer of anticipating information load the dice heav- 



342 



GAMBLING AND SPECULATIVE PROFITS 



[CH. 36 



ily against the lainbs. Secret combinations and all kinds 
of false rumors cause fluctuations large enough to use up 
the margins of the small speculator. At times a number of 
powerful dealers unite to cause an artificially high or low 
price, a situation called " a corner." But this is little other 
than gambling between betters. The general public gains 
and loses little if any by these operations, except in the evil 
effects they entail socially. 

S III. promoter's and trustee's profits 



The pro- 
moter's 
service to 
the owners 



The loss of 
the invest- 
ors 



1. The promoter of trusts performs in some ways a suh- 
stantial economic service. A promoter is one who undertakes 
to convert a number of unrelated factories, or establish- 
ments, into a trust, or combination. He gets options on 
different factories, that is, the right to buy them at an 
agreed price within certain time limits. He gets some bank- 
ing house to underwrite the combination, that is, to agree 
to dispose of a number of shares to the investing public. A 
certain number of shares go to the owners, a certain number 
to the banking house for its services in underwriting, and a 
substantial number, it may be ten or twenty per cent, of 
the enormous capitalization, to the promoter himself. This 
is payment for his ability to water the stock successfully, to 
capitalize it for more than its former value. Evidently the 
owners think he earns the money or they would not pay 
him. So far as there are economic advantages in large pro- 
duction, and inasmuch as there is always friction in the 
forming of new industrial arrangements, there is a real 
social service performed by the promoter. The gains of the 
promoter are in part the legitimate price of progress. 

2. A large part of the profits of promoter and of owners 
is unfairly taken from the investor. The larger modern busi- 
ness is less and less attached to particular neighborhoods. 
A much smaller proportion of investments is made in indus- 
tries which the investor himself can control or even see in 



§111] PROMOTER'S AND TRUSTEE'S PROFITS 343 

operation. Business, therefore, in these days is done largely 
on faith in other men. Especially the investor takes great 
chances. The prospectus announcing a reorganization is 
frequently misleading. It frequently misrepresents the 
sources of income and the probable dividends, conceals essen- 
tial facts, and makes misleading statements. The capital- 
ization often is absurdly high, compared with the value of 
the different establishments. In one case eight million 
dollars of stock were issued to represent factories whose 
combined value had been five hundred thousand dollars. 
So far as the capitalization is based on the increased 
profits due to the monopoly power, the profits of reor- 
ganization are taken out of the pockets of the public. 
But in fact even monopoly earnings cannot support such 
valuations, and from the outset if fair dividends are paid, 
they are falsely paid out of capital, not out of earnings. 
With the approach of bad times there must be a suspension 
of dividends, a fall in the value of securities, and a loss 
falling upon the investors. Such practices are a serious evil, 
for the stability of industry depends on the opening up of 
opportunities for safe investment to the average man. 

3. Corporation officers and trustees, speculating in the Thespecu- 
stocks of their own companies, are reaping illegitimate gains. ^°^ *™*' 
It is recognized by public sentiment and in law that for 
public officials to let contracts to themselves is bad morals 
and bad public policy. It is the duty of legislators not 
to make laws for companies in which they are interested. 
One of the greatest scandals in American public life, " the 
Credit Mobilier afi'air," was caused by the acceptance by 
members of Congress, virtually as a gift, of shares in a com- 
pany that was seeking favoring legislation. Such action 
must be looked upon as a sort of industrial treason, compar- 
able to the old form of political treason. Corporation officers 
are in a position of public trust toward the investors quite 
comparable to that of government officers toward the citi- 
zens. The power of directors and of other officers to manip- 



344 GAMBLING AND SPECULATIVE PROFITS [CH. 36 

ulate earnings and dividends, and thus to affect the market 
value of the stock, leaves the investing public helpless. The 
practice by officials in great corporations of speculating in 
their own stocks, whose prices they can manipulate, is so 
common as scarcely to attract comment. Large fortunes 
result from this betrayal of the trust imposed by the share- 
holders. This is not legitimate speculation ; it is like loading 
the dice, pulling the horse, drugging the pugilist— things 
despised and condemned even in gambling and sporting 
circles. 
Two types It appears, therefore, that in the complex conditions of 
°L!f^^"^^' modern business there is a legitimate concentration of risk 
in the more capable hands, but also a growth of opportuni- 
ties for illegitimate speculation and for large dishonest 
gains that were not possible before. These two types of 
speculation should be distinguished, as far as possible, in 
thought and in practice ; but this is not easy in concrete in- 
stances, which vary almost indistinguishably from the clear 
case of honest earnings to the other extreme of illegiti- 
mate gains. 



tion 



CHAPTER 37 
CRISES AND INDUSTRIAL DEPRESSIONS 

§ I. DEFINITION AND DESCRIPTION OF CRISES 

1. In a broad sense, a crisis is a decisive moment or Broader 
turning point; hence, in industry, a collapse of prosperity. a^^j^u°° °* 
In the course of a fever the crisis is the point where there is 
a turn for the better or for the worse. The figure of speech 
as applied to industrial conditions would seem to fail, in 
that what precedes is apparently exuberant health, not dis- 
ease. Business conditions do not move along uniformly. 
There are waves of prosperity. Profits are apparently 
great, then may be suddenly swept away. The profits of 
the prosperous time are partly illusory, or exist only on 
paper. The situation has all the unhealthiness of the fever- 
patient. Men trade in promises and when the crisis comes, 
they have only promises for profits. The discussion of busi- 
ness management and profits is not complete without a 
consideration of this rhythmic movement of confidence and 
prices. 

A crisis in the business affairs of an individual, in the 
sense of a collapse of prosperity, may occur from many 
mischances. A local crisis may be felt in some one neighbor- 
hood as a result of flood, of fire, or of other accidents. Such 
a case was that which occurred in 1864, in Manchester, 
England, when the cotton factories were compelled to close 
because the supply of cotton was cut off by the blockade of 
the ports of the South in the Civil War. Such a local 
crisis sometimes results from a change of transportation, 

345 



346 



CRISES AND INDUSTRIAL DEPRESSIONS 



[CH. 37 



Various 
tjrpes of 
crises 



Industrial 
conditions 
preceding a 
crisis 



throwing a town out of the line of trade. These have been 
mentioned in discussing chance and risk ; but the phenom- 
enon known generally as an industrial crisis is of wider 
extent and of a more peculiar nature. 

2, In a more special sense a financial crisis is the confu- 
sion and loss that mark the end of a period of rising prices; 
an industrial depression is the period of hard times that 
follows. The word crisis suggests a brief period, a moment, 
something that is severe, sudden, and soon over. The term 
financial panic is frequently used as a synonym for financial 
crisis. A crisis in the narrower sense has to do with prices — 
is always connected with money in some way. While, there- 
fore, crises may be divided into industrial, speculative, and 
financial, according to their immediate occasion, all of them 
are financial in the sense that they have to do with a 
change in the general price level. A crisis is a jolt to prices 
which shatters the credit of some banks, brokers, merchants, 
and manufacturers. Crises are thus peculiar to the money 
economy and to a developed industry. Not every business 
misfortune is to be called an industrial crisis, but only those 
where prices and credit are generally depressed. A long 
period of hard times is sometimes called a crisis, but it is 
better to distinguish it by the term industrial depression. 

3. The period leading up to a crisis is one of general 
prosperity. Industry in successive decades does not pass 
through an unvarying series of changes, but history repeats 
itself with sufficient regularity to justify the view that a 
certain series of changes is typical in modern industry. 
AVhen prices are at the lowest point many factories are 
closed, and much labor is unemployed. Conditions are worse 
in some industries than in others. General economy and 
great caution prevail ; few new enterprises are undertaken. 
To those having available money this is a good time to 
buy, and property begins to change hands. Then hoarded 
money begins to come out of its hiding-places. Money 
flows in from other countries, particularly if business condi- 



\I] DEFINITION AND DESCRIPTION OF CRISES 347 

tions are better abroad than here, for low prices make a 
country a good place in which to buy. At the same time 
that the money in circulation thus increases, there is 
a general return of confidence that increases credit. Not 
only are there more dollars, but each does more work. Then 
old enterprises are resumed and new ones are undertaken. 
The purchase of materials in larger quantities causes a rise 
in prices and an increase in costs. The surplus labor on the 
margin of efficiency gets employment, and wages begin to 
increase. The only classes not sharing in this improvement 
are the receivers of fixed incomes. As prices rise, the pur- 
chasing power of their incomes gradually falls. 

4. The crisis is a moment of widespread loss, which is The crisis 

• J1 T1 H 1 ^Q 

followed hy a long period of small profits to most enterprises, ^^^^-^^^ 
and of enforced economy. As prices cease to go up rapidly, 
the question arises in many minds whether the movement 
can continue, and if not, when it will cease. Men wish 
to hold on for the last profits, and are willing to risk 
something to gain them. When foreign prices do not rise 
in as great proportion as domestic prices, foreign imports 
are stimulated and the quantity of exports falls. This dis- 
turbs the equilibrium of money and requires at length large 
and continued exportation of specie. This checks prices, 
and, reducing the specie reserves of the banks, compels them 
to be more cautious. The fall in the value of many stocks 
and securities held by the banks forces many brokers 
and speculators to convert their resources into ready 
money. This is the moment of danger; weak enterprises 
find their foundations crumbling, and there are many fail- 
ures. The falling prices, the shattered credit, and the finan- 
cial losses force many factories to close; many workmen 
are thrown out of employment, and business must again 
enter upon a period of retrenchment, for it has completed 
the cycle of changing prices. 



348 



CRISES AND INDUSTRIAL DEPRESSIONS 



[CH. 37 



§ II. CRISES IN THE NINETEENTH CENTURY 



No financial 
crises in the 
Middle Ages 



European 
crises of the 
eighteenth 
and nine- 
teenth 
centuries 



1. The periods of industrial hardship in the Middle Ages 
%vere connected with adverse conditions of production, not 
with the collapse of prices. Periods of exceptional hardship 
in medieval times were mostly due to political oppression, 
famine, wars, pestilence, and scourges of nature. There 
being very little of the money economy, there was no devel- 
opment of credit and of credit prices. The money economy 
began, as has been noted, in the cities. As the use of money 
spread, as larger commercial enterprises were undertaken, as 
borrowing and the payment of interest became common, 
there began to appear in city trading circles, on a small 
scale, the phenomena of the modern crisis. 

2. In Europe general industrial crises date from 1763 
and have occurred at more or less regular intervals since. 
It frequently is said that the cycle, or period, of crises is ten 
years, but it takes an elastic imagination to find support 
for this in history. The crises of the eighteenth century 
occurred in 1763, 1783, 1793, these dates marking the close 
of wars of some magnitude. The crises were not widespread 
or general, but were more marked in England, which was 
most developed industrially and in its money economy. 
Likewise in the nineteenth century, the crises were of une- 
qual force in the various countries, usually being severer 
in England. The English crises may be roughly dated 
1803, 1825, 1838, 1847, 1857, 1864, 1875, 1890. These were 
attributed to various causes; that of 1825 to over-trading 
abroad; that of 1847 to railroad-building; that of 1864 to 
the interruption of the cotton trade and of commerce, as a 
result of the Civil War in America. While in many parts of 
England the crisis of 1864 was unusually severe, in other 
countries it was of little moment. Germany, after several 
years of great speculative prosperity, had a most severe 
crisis in 1875; while France (a somewhat significant fact), 



^MI] CRISES IN THE NINETEENTH CENTURY 349 

although prostrated by the war of 1870-71, losing a large 
amount of wealth, and paying a thousand millions of dollars 
to Germany as a war indemnity, escaped a commercial crisis 
almost entirely at that time. 

3. In the United States there have been five marked cnsesin 
crises: the first in 1817, the last in 1893. These crises were sutes""^ 
of date 1817-20, 1837-39, 1857, 1873, 1893. Major crises 
thus occurred about twenty years apart, and minor crises 
in several instances alternated with them, notably in 1866, 
1884, and we might add, 1903. These crises were the cul- 
mination of different kinds of speculation, usually spoken 
of as their causes. The crisis of 1817 was due to over-trading 
and to the immense importation following the war of 1812 
and the resumption of commerce with Europe in 1816. In 
1837-39 came in quick succession two crises, not quite dis- 
tinct from each other, the second similar to the relapse of a 
fever patient. The immediate occasions were over-specula- 
tion in lands, a great issue of bank money, national expan- 
sion, and over-confidence, possibly in some degree the heed- 
less financial measures of Andrew Jackson. The crisis of 
1857 followed a period of great prosperity marked by the 
discovery of gold in California in 1848, by great expansion 
of commerce, by the building of railroads, and by a great in- 
crease in foreign trade. The crisis of 1873, probably the 
severest in our history, is attributable to great speculation, 
especially to railroad-building on an unexampled scale fol- 
lowing the war. The blow, when it fell, was intensified by 
Ihe contraction of currency leading to the return to a specie 
basis and lower prices. The crisis of 1884, a comparatively 
slight one, occasioned (rather than caused) by the discus- 
sion of the money question, was followed by some years 
of noticeable depression. The years 1889 to 1892 witnessed 
a prosperity that culminated in a crisis in September, 1893, 
(likewise generally explained as due to the unsettled state 
of our monetary system) followed by a period of depression 
lasting until 1897. 



350 



CRISES AND INDUSTRIAL DEPRESSIONS 



[CH. 37 



General 
features of 
crises 



The period from 1897 to 1903 has been marked by great 
prosperity and by rising prices. The over-hasty prophecies of 
collapse in the last two years have thus far been falsified/ 
but there is now a general feeling of distrust in investing 
circles. Already there has been a reduction of dividends 
in leading industries, and here and there a fall in the value 
of stocks. High prices have greatly checked building. The 
great credit advances made on " industrials," the stocks of 
manufacturing corporations, are one of the main sources of 
danger. Caution, however, has been learned by experience; 
the banking interests are more closely coordinated and give 
better mutual support than in the past, and a considerable 
decline in stocks has already occurred without as yet affect- 
ing general prices of commodities. Various novel features 
in the situation make prophecy difficult, but a period of 
liquidation and low^er prices appears to be at hand. 

4. Irregular in time, and unlike in their immediate occa- 
sions, crises show some general features. The chief of these 
are told in the brief story of the course of prices. Crises 
are less severe in countries with less developed money and 
credit systems. They are harder in the United States and 
England than in Germany, harder in Germany than in 
France, harder in western Europe than in eastern Europe, 
harder in Christendom than in heathendom. They are less 
severe in rural districts, where prosperity depends more on 
crop conditions, and business has in it less of financial 
speculation. Their effects are least felt in the staple indus- 
tries, for when hard times come, people economize on the 
less essential things. The glove-factory, the silk-factory, the 
golf-club-factory are more likely to close than the flouring- 
mill. They are felt less by classes with fixed incomes than 

1 These statements are retained as they were^made in March, 1903. In 
the following September occurred a very remarkable panic in stocks 
which had the minimum of effect on general business. Wliile stock 
prices have somewhat recovered since that time, general business con- 
ditions, on the whole, tended for a while toward the worse until the 
spring of 1904. 



§111] VARIOUS EXPLANATIONS OF CRISES 351 

by those with variable ones. They affect wages and salaries 
less than profits. The rate of wages is affected only in a 
moderate degree, but laborers suffer in the loss of employ- 
ment. The money-lender who has eliminated chance as far 
as possible and has taken a low rate of interest loses little; 
the risk-taker who draws his income from dividends on stock 
probably loses much. 

§ III. VARIOUS EXPLANATIONS OF CRISES 

1. Over-prodi(ction and under-consumption theories are Glut 

those most ividely held. In the first annual report of the t^«<''^«8ot 
-^ '^ cnses 

United States Commissioner of Labor (1886) is given a long 
list of theories, more or less wild, that have been advanced 
in explanation of crises. It is simply a catalogue, not a log- 
ical grouping. Most of the views can be classed as under- 
consumption or over-production theories, which are but two 
aspects of the same idea. One view is that too many things 
are produced, another that too few are consumed. The 
over-production theorist, seeing that warehouses are filled 
with goods that cannot be disposed of for what they cost, 
that factories are shut down and men are out of employment 
for lack of demand, declares that productive pewer has 
grown too great. The under-consumption theorist, seeing the 
same facts, says that the trouble is lack of purchasing power. 
He admits that there are people who would like to buy these 
things, but he asserts that such people lack money because 
production grows faster than wages, wages being fixed, as 
he believes, by the minimum of subsistence— a theory akin 
to the iron law of wages. In both over-production and 
under-consumption theories the inequality of demand and 
supply is looked upon as a general one. Tliere is supposed 
to be not merely an unequal and mistaken distribution of 
production, but a general excess of productive power. 

The wide vogue held by these views would justify a fulh'r Defects of 
discussion and disproof of them here, did space permit. It «i"ttheorie8 



352 



CRISES AND INDUSTRIAL DEPRESSIONS 



[CH. 37 



Money 
theories of 
crises 



Their 
inadequacy 



must suffice to indicate merely that they have the same 
taint of illogicalness as the "fallacy of waste," the "fallacy 
of saving" and, still closer likeness, the "fallacy of lux- 
ury." They overlook the fact that an income, either of 
money or of other goods, coming even to the wealthiest, will 
be used in some way. It may be used either for immediate 
consumption or for further indirect use in durable form. 
Through miscalculation there may be, at a given moment, too 
many consumption goods of a particular kind, but the du- 
rable applications can find no limit until the inconceivable 
day when the material world is no longer capable of im- 
provement. At the time of a crisis, there is unquestionably 
a bad apportionment of productive agents, and a still worse 
adjustment of their valuations, but these in no wise negative 
the basic economic fact of the scarcity of wealth. 

2. Another group of theories explains the crises as being 
due to money, either too much or too little. The unregu- 
lated issue of bank-notes has been assigned as the cause of 
crises, especially under the circumstances accompanying 
such crises as those of 1837 and 1857 in America, when 
bank-note issues chanced to be the agency most marked in 
the undue and unsound expansion of credit. The issue of 
government paper money, leading to inflation and specula- 
tion, is assigned as a cause leading up to such a crisis as that 
of 1873, following our Civil War. The reverse view is taken 
by the advocates of a cheap and plentiful money. They say 
that these crises were caused, not by the expansion, but by 
the reduction of bank-notes; for example, not by the infla- 
tion of prices through the issue of greenbacks in 1862 to 
1865, but by the contraction of the currency from 1866 
to 1873. 

There is only a fragment of truth in these various views. 
It is always lack of money at the moment of the crisis that 
causes any particular failure, and in that sense it is always 
lack of money that causes a crisis. But the question is, 
whether in any reasonable sense it can be said that it was 



§111] VARIOUS EXPLANATIONS OF CRISES 353 

lack of a circulating medium before the crisis that brought 
it on. There is no support for this view, except in the rare 
case when the money standard is undergoing a rapid change, 
as in the United States from 1866 to 1873, and the statement 
then needs much modification and explanation. The money- 
theories of crises are nearer to the truth than are the over- 
production type, for the crisis is always connected with 
money and prices. But it cannot be said that the absolute 
amount of money in circulation in the period preceding 
crises gives occasion to them. In a few instances a rapid 
change in the amount has had an important effect, but this 
fact does not explain crises in general. 

Lack of confidence is said to be a cause of crises. This 
is a truism, but the lack of confidence is not without "reason 
and cause. Over-confidence in the period of expanding 
prices is succeeded by extreme depression when many false 
hopes are shattered. 

3. Crises must he explained essentially as tlie forcible capitaiiza- 
and sudden movement of readjustment in tlte mistaken ^'i'°H„^'^ 
capitalization of productive agents. Capitalization runs 
through all industry. The value of everything that lasts 
for more than a moment is built in part upon rents that are 
not actual, but expectative, whose amount, therefore, is a 
matter of guesswork, or " speculation." Many unknown 
factors enter into the estimate of future rents. The uni- 
versal tendency to rhythm in motion (material or psychic) 
manifests itself in an overestimate or underestimate of rent 
and of every other factor in value. This is emphasized by 
a psychological factor called the "hypnotism of the crowd." 
Most men follow a leader in investment as in other things. 
Tlie spirit of speculation grows till it becomes almost a 
frenzy, and people rush toward this or that investment, 
throwing capitalization in some industries far out of ecpii- 
librium with tliat in otlicT'S. 

The use of credit enhances the rliytlun of price. A large 
part of business is done practically on margins. If the value 



354 



CRISES AND INDUSTRIAL DEPRESSIONS 



[CH. 37 



Psychologi- 
cal nature 
and objec- 
tive condi- 
tions of 
crises 



Widespread 
effects on 
incomes 



of a thing fully paid for falls in the hands of the owner, 
he alone loses; but if the value of a thing only partly paid 
for falls so much that the owner is forced to default in his 
payment, the loss may be transmitted along the line of 
credit to every one in the series of transactions. A credit 
system, highly developed, is a house of cards at a time of 
financial stress. There is an element of credit in all modern 
business. Enterprisers enter into strenuous rivalry to secure 
the profits of a rise, ever hoping to get out whole before the 
crisis comes. 

The fundamental cause of crises thus is seen to be psycho- 
logical ; it is the rhythmic miscalculation of rents and of 
capital value, occurring to some degree throughout industry, 
but particularly in certain lines. But this subjective cause 
in men is given full opportunity for action only when certain 
favoring objective conditions are present. Most noteworthy 
of these besides the credit system is a dynamic condition of 
industry. The past century has opened up new fields for 
investment on an unexampled scale. Investment has ad- 
vanced both intensively and extensively in a series of great 
weaves. New machinery and processes have given undreamed 
of opportunities for enterprise in the older countries, and 
the physical frontier of investment has moved outward with 
the march of millions of immigrants to people the fertile 
wilderness. Such factors disturb the equilibrium of prices 
both in time and space, give a powerful impulse toward 
higher values in the older lands, and stimulate the hopes 
of all investors. When the balance between the capitaliza- 
tions of various industries and between the rents of the 
various periods proves to be false, the inevitable readjust- 
ment causes suffering and loss to many, but particularly in 
the inflated industries. But, because of the mutual relations 
of men in business, few even of those who have kept freest 
from speculation can quite escape the evils. 

4. Crises must he discussed in connection with other sub- 
jects than profits. In the text-books the subject of the 



5 III] VARIOUS EXPLANATIONS OF CRISES 355 

crisis is variously classified. It may well be discussed with 
money, credit, and banking. It has its bearings on wages, 
justice in distribution, the theory of interest, and the con- 
simiption of wealth. But the reasons for taking it up in 
connection with the subject of profits are strongest. In no 
other connection is the presence of the element of specula- 
tion and of chance profit and loss in business so forcibly 
seen. 

The income of every class of society is to some extent Their prob- 
affected by these more or less periodic fluctuations. They are g^^^^^ 
in part the price paid for progress under the constantly 
shifting conditions of our dynamic industry. In part they 
are the proof of industrial maladjustment. The force of the 
shocks will no doubt be much reduced by better banking and 
business methods, and by a sound currency system. More 
important still, the development of moderation, conservatism, 
and a less speculative spirit among the leaders of business 
will do much toward softening the asperity of these scourges 
of industry. 



PART III 
THE SOCIAL ASPECTS OF VALUE 



PART III 

DIVISION A-RELATION OF PRIVATE INCOME 
TO SOCIAL WELFARE 

CHAPTER 38 
PRIVATE PROPERTY AND INHERITANCE 

§ I. IMPERSONAL AND PERSONAL SHARES OF INCOME 

1. JJnder the title ''the social aspects of value" are to he Functional 
considered the influences exerted upon incomes hy various so- T^'Jf*"'^^ 

' '^ -^ distnbution 

cial acts, ideals, and institutions. The incomes from the wages 
of free labor and those from the rent of wealth, as studied 
in the abstract theory of value, are alike in their imper- 
sonal aspect, their relation to utility. But while wage flows 
from a personal source— is an income appearing to reward the 
personal effort of the laborer, the income of the wealth-owner 
is due to the uses of goods. In the abstract theory of value 
we do not seek to get behind this impersonal phase of rent'. 
The income arising from goods goes to the de facto owner of 
the goods. We do not ask how the goods first came into 
his possession, whether through labor or as a gift, whether 
stolen or inherited. Indeed, the economic theory of competi- 
tive rent may be said not to recognize the personal fact of 
ownership ; it is concerned with tlie impersonal fact of usu- 
fruct. The theory of economic rent, of time-value and cap- 
ital, and of wages, as measured by efficiency, is impersonal, is 
a study of functional distribution. In the problem of monop- 

359 



360 



PRIVATE PROPERTY AND INHERITANCE 



[CH. 38 



Social insti- 
tutions and 
personal 



oly the personal factor is more prominent, but the economic 
study of rent cannot well stop there. 

An answer, at least in broad outline, must now be given 
to the question why some men are permitted to hold wealth 
incomes as their "own," that is, as "property," while other men 
are propertyless. Why do the owners exact payment for the 
use of goods, and why are they allowed by their fellows to 
do so? Back of these facts is a great system of social 
institutions that helps to determine what men will do. Mar- 
ket value is a social fact; price is determined by the bidding 
of men under the existing social and political conditions. 
These broader social aspects of value remain for considera- 
tion. The influence of lawmaking, of collective action, and of 
social institutions on value must be noted. Incidentally, this 
has been done in speaking of patents, political monopolies, 
and related questions; but mainly the subject has been 
viewed from the individual standpoint; now it must be 
looked at more fully from the social side. 

2. The study of personal distribution should include a 
further explanation of the various elements that unite to 
form the individual's income. "Distribution" in economics 
is the reasoned explanation of the way in w^hich the total 
product of a society is divided among its members. It is 
a logical question and not an ethical one. The economist 
first asks, What is the effect of utility on value? and, next, 
What is the relation of these goods to the personal incomes 
of the members of society ? It is not his peculiar part to say 
■whether this is the best distribution in an ethical sense, yet 
in pursuing the question of distribution one comes to the 
border of certain moral questions. 

The impersonal and the personal views of distribution are 
not, however, contradictory ; they are different aspects of the 
same question. It cannot be said that the analysis of eco- 
nomic rent is a purely abstract piece of work. In fact, the 
impersonal view of distribution is essential to an under- 
standing of the personal view of it. The one gives general 



Harmony of 
the studies 
of imper- 
sonal and of 
personal 
distribution 



of personal 
incomes 



^I] IMPERSONAL AND PERSONAL SHARES OF INCOME 3G1 

principles, the other the special cases. In the practical 
economic issues of the day, the most urgent need is a better 
popular understanding of the abstracter theory of value. 
It is a guiding thread through otherwise bewildering mazes. 

The actual incomes of individuals are made up of different Composition 
elements. The wage-earner and the salaried man are rarely 
quite without material wealth. The enterpriser gets some 
income also in the form of contract interest, or as rent from 
machinery. Actual personal incomes are therefore a sum of 
various functional or impersonal incomes. The earnings of 
every agent may be thought of as always going either to 
some individual or to some group. By social convention the 
receiver of incomes that are not personal gifts is supposed 
to have produced them. This involves the great assumption 
that the owner of a piece of land has produced or contributed 
in some way to society an amount equal to the rent. This 
may be true in many cases, but in many cases this view 
cannot be accepted without close scrutiny. 

3. Property and wealth are respectively the personal and Lawinre* 
the impersonal, the legal and the economic, aspects of pro- 
ductive agents. Law holds an important place in the dis- 
cussion of actual economic questions. This fact was not 
overlooked by John Stuart ]\Iill, and it has been far more 
clearly recognized in the last few years, especially by the 
German economists. Political law in the broadest sense, as 
embodied in the state, is, in the first place, a set of rules to 
guide the conduct and regulate the relations of men in 
society— a legal code; it is, in the next place, a governmental 
machine to determine disputes between men— a judicial 
system; and it is, finally, physical power to bring contestants 
into court and to secure and protect their i-ights— a police 
force. Whether acting through legislature, courts, or police, 
in all its dealings with wealth the law is predominantly 
personal. The question the law asks and answers regarding 
wealth is not What, but Who? AVlio is the owner, who 
should control, receive, enjoy the income ? Economic wealth 



lation to 
wealth 



362 



PRIVATE PROPERTY AND INHERITANCE 



(CH. 38 



Property 
and wealth 



consists of scarce things, of valuable agents, and because they 
are scarce, men quarrel over them. Because of the imper- 
sonal economic fact that a field and a machine produce scarce 
goods, arises the legal question as to which man is entitled 
to enjoy them. 

In the case of material things, property value and capital 
value must be exactly equal. Property rights cover the 
ownership of a material thing. Material property consists 
of things viewed with reference to ownership ; capital 
consists of the same things viewed with reference to 
their economic services. There are other property rights 
besides those in material things, various immaterial rights 
controlling the action of the individual and thus giving a 
sort of ownership of the individual's actions. Such are 
patents which forbid other men making a particular kind 
of machine; copyrights which forbid other men printing 
certain writings; legal contracts that limit the action of men 
in various ways, and thus appear to abridge their liberty. 



Property 
and income 



§ II. THE ORIGIN OP PRIVATE PROPERTY 

1. Property is ownership, the legal control over the 
sources of economic income. The Latin word property means 
ownership, and hence that which pertains to the individual, 
that which is a man's own. The control of property is greater 
or less. The law makes between property rights and equity 
rights certain subtle distinctions which have their reason 
in the history, if not in the logic, of the law, but which are 
not essential to economic discussion. What we are interested 
in are the equitable claims of men to w'ealth rather than the 
technical property rights. With that thought let us consider 
the value of the control of wealth. If a farm worth ten 
thousand dollars is mortgaged for five thousand dollars, its 
economic worth is ten thousand dollars after as before the 
mortgage, but the equitable claim is divided into two shares 
of five thousand dollars each. The value of the property 



^n] THE ORIGIN OF PRIVATE PROPERTY 363 

right cannot, in a reasonable view, be greater than the value 
of the economic wealth it covers. There is much confusion 
in the law of taxation on this point. The law treats the 
farm as property and the debt upon it, whether secured by 
a mortgage or not, as another body of property. Needless 
to say, this leads to absurd conclusions in reasoning, and to 
gross injustice. 

There are different forms of ownership: first, private, as Forms and 
that of individuals, families, partnerships, or corporations; ™'^"°* 
second, public or state, as the ownership of the state house, 
the highway, the Adirondack forest-reserve or the Erie 
Canal. These are equally effective as against the claims of 
outsiders, but the rights of those inside the circle of owner- 
ship differ. For example, the rights of one shareholder 
against another, or the rights of one member of a family 
as against another, are not the same as the rights against 
outsiders. Private property is the characteristic feature of 
our present industrial society, but it exists side by side with 
state property and with many intermediate grades between 
private and common property. Private property, while at- 
tacked on some sides, is usually accepted without question; 
but in this age of inquiry its origin should be examined, its 
limits and the reasons for them should be noted, and its 
purpose, faults, and effects should be set clearly before the 
judgment. 

2. The older theories of the origin of private property various 
are those of occupation, conquest, lahor, natural rights, and t'^^"^"* 
law. The theory of occupation is that property is based occupation 
upon the priority of claim of one who finds wealth without 
an owner and appropriates it. This, to be sure, is a state- 
ment of what happens in the settlement of new countries, but 
it is not an explanation of the property rights that are 
arising every moment, nor does it give a logical reason for 
the continuance of ancient property rights. 

The same can be said of the contpiest theory, the theory Conquest 
that property is based on force. It applies to the invasion of 



364 



PRIVATE PROPERTY AND INHERITANCE 



[CH. 38 



Labor 



Natural 
rights 



Law 



Property in 

early 

societies 



the Roman provinces by the barbarian tribes who divided 
the country and enslaved the population. But it rarely ap- 
plies to present-day happenings and at its best it cannot, to 
modern minds, "justify" present property rights. 

The labor theory, meeting some queries where others fail, 
is that ownership is based on production, on the right of 
a man to that to which his brain and his muscle have im- 
parted value. It is evident that this test leaves without 
explanation or justification a great number of things that 
do exist and have existed as property. 

The natural-rights theory is that property is necessary 
for the realization of the dignity of human nature. This, if 
true, would be not so much an explanation as a condemna- 
tion of private property as it has existed in most cases, as 
millions of men are in every land all but lacking in property, 
and inequality of possession is everywhere marked. This 
theory expresses, however, one of the worthy ideals of mod- 
ern democracy. Although, in common with the various other 
"natural rights" theories, it must to-day be deemed too 
absolute and too individualistic, it contains a far-reaching 
truth, of which due account must be taken in our social 
philosophy. 

The legal theory is that property exists because the law 
says it shall. This expresses a truth, but is no more than a 
truism. The law determines the limits of property, but 
what determines the limits of the law? What practical or 
social justification is there for passing and continuing such 
law? The legal theory does not explain anything finally. 
Each of these theories has its defects, but each points to some 
fact important and significant, at certain times and places, 
in the explanation of this widespread institution. 

3. The institution of private property has evolved under 
diverse conditions; the question of its origin is 7iot the same 
as that of its present justification. In early societies individ- 
ual property rights were not very clearly marked. Every 
tribe asserted against other tribes, and tried to uphold, by 



§11] THE ORIGIN OF PRIVATE PROPERTY 365 

war, its claims upon its customary hunting-grounds; but the 
claims of the individual hunter and fisher within the tribe 
did not often come into conflict. Private property at the 
outset was in personal possessions, ornaments, weapons, uten- 
sils, which were very meager in that primitive society where 
it was the custom "to go calling with a club instead of a 
card-case." Only later came individual property in land. 
A few years ago it was generally believed that the organi- 
zation of the old German tribes was politically an almost 
perfect democracy, and economically a communism wherein 
all had equal claims on the land. To-day this opinion is 
very seriously questioned. It seems probable that the so- 
called communism was really an oligarchy of the favored, 
and that the masses lived in subjection, cut off from all but 
a meager share in the public property. 

However that may have been, strong forces wjthin historic onginvs. 
times have put an end to the common ownership and tillage ^yg^fflcati n 
of land as it existed among the serfs of Europe. The common of property 
tillage of land was shown by experience to be wasteful. Not 
only did competition tend to bring the economic agents into 
more efificient hands, but the movement was furthered by 
many acts of injustice and violence on the part of those in 
power. Inquiries into the origin and development of this 
social institution are interesting and helpful in forming an 
estimate of its present significance, but the problems of the 
past are not those of to-day. Whether or not the ancient 
])eginning of property in Europe was in violence and evil 
has but a remote bearing on the question as to the present 
working of it. Social conditions and needs have not changed 
more than have the forms and limits of property itself. Each 
generation has its own problems to solve, and each must 
test existing institutions by their present results, ignoring 
for the most part the evils of the past. 

4. Private property may noiv he justified mainly on the 
grounds of social expediency. This is a broad explanation 
under which can be brought the many varying conditions; 



366 



PRIVATE PROPERTY AND INHERITANCE 



[CH. 38 



Social 
expediency 
the ground 
of private 
property 



Shifting 
limits of the 
law of 
property 



but it has the fault of a broad explanation, that it needs 
to be further explained. Conceding that private property 
works hardship to the individual in many cases, it must be 
justified on the ground that, on the whole, it furthers the 
progress of society. Private property is looked upon by some 
as merely reflecting or expressing the economic inequalities 
of men ; the man poor in ability is the man poor in property. 
It is looked upon by others as exaggerating, indeed at times 
reversing, the economic abilities of men. In general, it must 
be judged by this test : Does it further the welfare of society 
better than would any alternative plan for the control of 
economic wealth'? The question is not whether it is faultless, 
for no human institution is so. Nor must it be assumed that 
property is a fixed and uniform mode of control ; there are 
many kinds of property. Different parts of wealth may be 
treated in dift'erent ways : there may be private property 
in wagons, and public property in roads; private property 
in houses, and public property in forests ; private property in 
automobiles, and, in some countries, public property in rail- 
way-carriages. But any rule of property, like any other 
workable human law, must be applicable to all individuals 
that meet the conditions. Hence any human institution 
must be judged by its average working, not by exceptional 
cases. 

The very acceptance of the theory of social expediency 
implies the need of a readjustment of the institution of 
private property ; for private property, as it is found to-day, 
is complicated by many historical accidents. Survivals of 
ancient injustice and relics of feudal institutions that rest 
on no vital reason remain in our new country as well as in 
the older ones. The limits of property in many respects are 
determined, not according to the logic of expediency, but by 
the social inertia which often governs succeeding generations. 



§111] LIMITATIONS OF PRIVATE PROPERTY 367 



§ III. LIMITATIONS OP THE RIGHT OF PRIVATE PROPERTY 

1. Unmodified private control of property is iu\Ti7iown: PubUc 
the puhlic makes many reservations in its own interest. Few J"'^^'^®^*^ 

*^ -^ _ _ limiting 

realize the manifold ways in which property rights are lim- property 
ited. There is, first, a whole set of limitations to prevent ^^^^ 
nuisances. An owner in many situations is not free to build 
a slaughter-house or to start a glue-factory on his land. 
Property is governed by general public utility, and anything 
that threatens to become a nuisance or a danger is excluded. 
When, under the right of eminent domain, the state or the 
railroad takes the old homestead from its owner who would 
live and die there, the payment of money damages to him 
does not make this the less a limitation of his property rights. 
Rights of way on property exist either through contract or 
by prescription permitting its public use. Most important 
of all limitations is the right of taxation, by which society 
takes more or less of private incomes for purposes of which 
the individual owners may in no way approve. 

2. The law enforces a midtitude of private claims Private 
against private owners. A variety of rights called easements ^^^g 
or servitudes may attach to private property, modifying its property 
exclusive use. Leases for any period are a virtual limitation "^ 

of the control and division of the ownership. Both the 
holder of the lease and the owner of the property have 
certain rights before the law. The lender of money secured 
by mortgage has a legally recognized and enforceable interest 
in the mortgaged wealth. Property is left in trust for the 
benefit of persons or of institutions or of the public, and is 
administered by trustees who are strictly bound to the execu- 
tion of the terms of their instructions. Contracts of many 
sorts are entered into by owners, limiting their control in 
manifold ways, and the law enforces these contracts. These 
all form a complex of equitable claims, which together equal 
in value one undivided property right, which in turn equals 



368 PRIVATE PROPERTY AND INHERITANCE [CH. 38 

the value of the wealth. These claims mutually limit each 
other (whether they be called equitable claims, or liens, or 
property rights), and wealth is not multiplied by multiply- 
ing the claims, as the lawmakers unfortunately sometimes as- 
sume to be the case. 
Limitation 3. The right of Request, or of gift at death, is limited in 
of bequest ijarious ways in different countries. The term bequest im- 
plies a will, usually a written will in which the person, fore- 
seeing death, has expressed his wishes as to the disposition 
of his property. It is said sometimes that bequest is a 
"logical" result of private property, but the law does not 
treat it as such. In countries where hereditary aristocracies 
exist, primogeniture is in some cases required by law, in 
others so strongly favored by public opinion that it is prac- 
tically always followed. Custom limits bequests in England 
to members of the family, and wills giving outside the 
family are rare, and are almost always broken in the courts. 
John Stuart Mill contrasts this with the frequent practice 
by rich men in America of giving for public purposes. In 
France the right of bequest outside the family is legally 
limited; only the share of one child can be willed away 
by the father, and the rest must be equally divided among 
the children. Settlements and fidei commissa are limited in 
many countries, because of the recognized social evils re- 
sulting from the tying up of estates for generations. 
Throughout the history of England, Parliament has given 
attention to the question of mortmain, which chiefly con- 
cerned the drifting of great estates into the hands of the 
church or of corporations, as a result of bequests by the pious. 
Only recently in England, and to a less extent in this 
country, has been seriously discussed the policy of permitting 
unlimited endowments to charitable institutions, and new 
legislation has diverted from their original purposes some 
of the old endowments. These varied and often strict lim- 
itations of the right of private property are all determined 
by some thought, wise or foolish, of social expediency. 



^III] LIMITATIONS OF PRIVATE PROPERTY 369 

4. TJie law of inheritance varies greatly with time and Limiution 
place. Inheritance, in contrast with bequest, usually means f^^^^ 
succession to the property of one who has died intestate, 
that is, has made no will. The old idea of family unity 
survives in great measure in modern laws of inheritance. 
The nearest living relatives, no matter how distant they may 
be, inherit property when there is no will. When a miser 
dies in solitude and neglect, the world must be searched over 
to find a remote cousin to take the hoarded M^ealth. Inheri- 
tance is limited largely at present by the power of taxation. 
The view is growing that the claims of the society in which 
wealth has been acquired are stronger than those of relatives 
distant alike in space, in blood, and in affectionate interest. 
This view is reflected in many recent inheritance-tax laws 
which take from the shares of distant relatives a goodly 
portion for public purposes. 

The question is raised in many minds, If private property 
is not an absolute right, what shall be its limits? What 
changes should be made in it? The essential thought in the 
various attacks on the institution of private property is that, 
because it occasions inequality in incomes, it is not socially 
expedient. The conviction is growing that, in some general 
way, incomes should correspond to, and reflect, social service. 
It is well to consider more closely what the terms social 
expediency and social service imply. 



24 



CHAPTER 39 
INCOME AND SOCIAL SERVICE 



The justice 
of property 
questioned 



Social effect 
of the right 
to give 



g I. INCOME FROM PROPERTY 

1. Property rights must meet the test of social expedi- 
ency. If private property is defended on the ground of 
social expediency, it must show good social results. It is not 
a sacred thing ; it is open to examination, and must be judged 
by its fruits. Of all the forms of income, that from property 
has been most strongly attacked. The thought is that enjoy- 
ment of wealth should not be found apart from labor, and 
that it should bear some proportion to services performed. 
The enjoyment of an ample income by one who does no more 
than to draw checks or to sign coupons seems to many 
minds to be unjust ; and it is often questioned whether there 
is any social service performed by the receivers of the rent 
from land. Property seems in many cases to be distributed 
without rule or reason. It does not correspond with beauty, 
strength, wit, wisdom, temperance, gentleness, or charity. 
Since the beginning of the Christian era, reformers have 
assailed and preached against the prevailing inequality of 
wealth. The idea that incomes, if not equal, should corre- 
spond to social service has always been present in some 
vague way in the minds of men. 

2. The right to transmit property hy inheritance or hy 
gift may he judged wiih reference to its effect on the giver, 
on the receiver, and on society at large. It is well to take 
these three points of view. The right to dispose of property 
either during life or at death has undoubtedly in many 

3/0 



fl] INCOME FROM PROPERTY 371 

ways a good effect on the character of men. It stimulates 
the father to provide for his children, the husband to provide 
for his wife. There is a joy in giving, a joy in the power to 
bestow one's wealth on those one loves. The right to give 
stimulates industry, frugality, ingenuity, and yields pro- 
ductive results. j\Iuch of the existing wealth probably never 
would have been created if men did not have this right of 
gift. But there is a limit to the working of this motive, and 
other motives often are much more effective. Many men 
after gaining a competence continue to work for love of 
wealth and power in their own lifetime, as the miser contin- 
ues to toil for love of gold. When men without families die 
wealthy, when men that have not the slightest interest in 
their nearest relatives labor and amass wealth till their 
dying day, it is evident that the right to bequeath property 
has little to do with their efforts. Love of accumulation 
and love of power in these cases supply the motive. A more 
limited liberty to dispose of property at death might still 
suffice, therefore, to call out the greater part of the efforts 
now made to accumulate property. 

That the effects on the receiver of the property are good Effect of 
is somewhat more doubtful. It is true that children raised in ,^f„"f ° 

IvCclVC 

great comfort or luxury would be more than ordinarily un- 
happy if plunged into poverty or even into humble cir- 
cumstances on the death of their parents. There is much 
social justification for permitting families to maintain an 
accustomed standard of comfort. Few would deny that a 
moderate provision by parents to provide education and op- 
portunity for their children is commendable and desirable. 
But the evil effects of waiting for dead men's shoes are 
proverbial. Many a boy's greatest curse has been his father's 
fortune. Men of native ability wait idly for fortune to 
come, and opportunities for self-help slip by unheeded. The 
world often exclaims over the failure of the sons of noted 
men to achieve great things, for, despite confusing evidence, 
men still have faith in heredity. A too easy fortune saps 



372 INCOME AND SOCIAL SERVICE [CH. 39 

ambition and relaxes energy ; and thus rich men 's sons, if 
not most carefully and wisely trained, are made pitiable 
paupers in spirit, while the self-made fathers think their 
boys have chances they themselves did not enjoy. The 
greater social loss is not the dissipated fortunes, but the 
ruined characters. 
Broader The effects of inheritance on the community are good in 

onnheri^*^ so far as it secures efficient management of wealth. If the 
tance SOU or relative has been in business with the deceased, there 

is a reason that he should inherit the property, and his 
succession to it makes the least disturbance to existing busi- 
ness conditions. But every profligate son is an argument 
against inheritance; every incompetent heir is an argument 
in the hands of the enemies of the existing order of society. 
It is to society's interest that no able-bodied member shall 
stand idle. Every child should have presented to him the 
motive to devote his powers to the social welfare in economic 
or other directions. Moreover, many feel that the great for- 
tunes now accumulating through successive generations in 
the hands of a few families are endangering our free society, 
even if these fortunes should continue to be well adminis- 
tered. There is a widespread feeling that the heredity of 
great wealth is, like the heredity of political power, out of 
harmony with the democratic spirit— though this may easily 
become a misleading comparison. Still, democracy wishes 
to see men as individuals put to the test, not profiting forever 
by the deeds of their forebears. This feeling is shared by 
those who cannot be charged with radical prejudices. A 
few years ago the Illinois Bar Association passed a somewhat 
startling resolution favoring moderate limits to inherited for- 
tunes. Every year sees bills of this purport introduced in 
the legislatures and in Congress. Andrew Carnegie says it 
would be a good thing if every boy had to start in poverty 
and make his own way. Cecil Rhodes recorded in his will 
his contempt for the idle, expectant heir. 

3. Social expediency will limit the right of intestate 



§1] INCOME FROM PROPERTY 373 

inheritance to persons in essential economic and social rela- The test of 

wise inheri- 
tance laws 



tions. Public opinion is not yet crystallized in favor of this '*"^®'° ^"" 



formal proposition, but tends strongly toward it. The fore- 
going considerations show that the right of gift in the life- 
time of the givei^. should be the freest. The right of bequest, 
that is, of gift by will, should be liberal. The man who has 
acquired wealth may well be trusted to decide who bear to 
him a close social or personal relation, and to say whose 
lives have in a measure furnished the motives of his activity. 
But the right of intestate inheritance by distant relatives is 
one that stands on weak social foundations to-day. It ap- 
pears to be an unreasonable survival from more patriarchal 
conditions. The true test is whether the wish to provide for 
these heirs has furnished the motive for the producing and 
preserving of the wealth. The claims of those nearest in 
blood and closest in personal relations are strongest. Fam- 
ily affection and friendship form the strongest of social ties, 
and it is socially expedient to cultivate them. Motives for 
abstinence and industry must be strengthened. But the same 
test shows that the zealous regard of the American law for 
the rights of grandnephews in Australia, or even of brothers 
long absent in distant quarters of this country, is irrational, 
and is unjust to the community where the fortune lies. 

4. Many fortunes huilt on favoring legislation are de- social 
fended as due to social service. In the Middle Ages kings ^{"^y^red 
often granted great estates to nobles as rewards for past merit classes 
and as a payment for expected public actions. The great 
landlords were the magistrates, military leaders, and support- 
ers of social order, and thus, in the judgment both of the king 
and of the commonalty, the nobles earned their incomes by 
their social service. While this practice has disappeared 
under constitutional government, large grants are still made 
to royal families. Many Englishmen who are democratic at 
heart uphold such grants as the price of social stability. Re- 
gard for royalty is so deep-rooted in the minds of the people 
of any long-established monarchy that there is always 



374 



INCOME AND SOCIAL SERVICE 



[CH. 39 



Possible 
social 
service of 
protected 
industries 



Private 
property in 
land ques- 
tioned 



danger in change. England must pay many millions annu- 
ally as the price of loyal and conservative sentiment. So 
long as this is true, a family of royal figureheads and idlers 
performs a social service. 

Protective tariffs sought by wealthy n>flnufacturers are 
granted, not ostensibly to help them, but to help the country. 
The argument is that the benefits are diffused. Aid to enter- 
prises in private hands, such as ship subsidies or as the 
grants to the Pacific railroads, are defended on the ground 
that, as a whole, society benefits by thus increasing the in- 
come of one class. The promise of social service is most 
urged by those who get the immediate benefit. Their eyes 
are keenest. The manufacturer sees clearly the benefits that 
will come to his factory from a protective tariff, but before 
he can get it he must convince many others that they too 
will gain. The majority of the American electorate is not 
voting a special favor at the polls, but is recognizing what it 
believes to be in its own interest. Most students of social 
questions doubt the wisdom of most of these grants to the 
wealthy on grounds of social service. The burden of proof 
is on their advocates, but few to-day are so rash as to say that 
such a claim of social service is never sound. 

5. Property in natural agents is the most strongly at- 
tacked. In the case of great natural deposits, such as those 
of coal or iron, the social service that is performed by the 
mine-owner is hard to see. Great incomes are drawn in the 
form of royalty or rent by those who never lift a pick 
or direct a stroke of work. Agricultural land in the hands 
of absentee landlords yields an income not very clearly due 
to social service, and this phase of property has been espe- 
cially assailed during the past century. The modern form 
of this discussion is concerning "the unearned increment," 
the rise in the value of lands as a result of social growth. 
It is proposed to appropriate by "the single tax" the entire 
rental value of the land for the use of the public. 

The defense of property in land is first positive: taking 



§1] INCOME FROM PROPERTY 375 

not the extreme but the usual case, private property secures 
the discovery and development of natural resources and 
their thorough use and good management (not necessarily 
by personal labor with the hands). If this is true, it is well 
for the individual and for the community to have this 
wealth in private hands. But in other cases there is merely 
a negative argument for property in land: no other better 
method of employing it has been devised and found prac- 
ticable. The experience with state ownership of mines, for- 
ests, and estates has not definitely answered in every case the 
question whether the social results of state ownership are 
more favorable than those of private ownership. In some 
eases they clearly are not, in others they may be ; and as the 
balance of opinion inclines in the direction of public owner- 
ship, other reforms will doubtless be undertaken. 

6. The present inequality of wealth, not private property inequality 
as such, is often attacked. It is estimated that in the United o^ fortunes 
Kingdom two per cent, of the families own seventy-five per 
cent, of all the wealth, while ninety-three per cent, own less 
than eight per cent. In the United States it is estimated that 
one per cent, of all the families own more than the remaining 
ninety-nine per cent. ; and at the other part of the scale 
eighty-seven per cent, of all the families own less than 
twelve per cent, of all the wealth. The trend has been toward 
concentration of fortunes and a larger proportion of the 
growing income from property is in a few hands. Many 
feel that the law of property is defective when this is pos- 
sible, although at the same time the average income of the 
wage-earner is increasing. Yet, it is not the institution as 
a whole that is attacked, but its details. The custom of equal 
division of property among children in the United States 
has not been as effective in keeping fortunes small as was 
expected. The wealthy American families have averaged 
small, and in some of the most prominent the rule of equal 
division has not been followed. Opportunities for the in- 
vestment of small savings at low interest are not lacking, but 



376 INCOME AND SOCIAL SERVICE [CH. 39 

the great fortunes overtower the little ones, securing the 
great profits and great political and economic power. The 
farms and the villages are refuges for the small industry 
and for the small fortunes, and this fact has a great influence 
on our national character. The whole social atmosphere in 
the cities, with their extremes of wealth, differs from that in 
the country, and this contrast promises to become greater 
as the years go on. 
Private 7. The ideal of property rights is that they shall furnish 

^sSlm^' ^^'^ highest motives for efficient social service. Private prop- 
erty furnishes such a motive in a broad way, but its most 
ardent defenders Avill recognize that it does so imperfectly. 
It is an institution that has been tried and that does the 
work, while other methods suggested to do away with it are 
found to be dreams. The ideal of socialism is the abolition 
of private property, the centralizing under the control of the 
state of all wealth, except the simple personal belongings, 
clothing and other consumption goods. But history and 
human nature unite to testify that extreme socialism is an 
unworkable plan, excepting under special conditions, as 
in barbarous times and under a political despotism. The 
modern ideal for the control of wealth is the best attainable 
harmony of liberty and efficiency. If private property as 
it is, falls short of that ideal, at any rate it works either on a 
small or on a large scale, and socialism does not work at all. 
Property rights as they exist are not a product of pure 
reason. They are the result of social evolution, of historical 
accidents, of class legislation, and of selfish interest in many 
cases. Changing social conditions and ideas are bringing 
many changes in law, and further change must be expected 
to come. 



§ II. INCOME FROM PERSONAL SERVICES 

1. Incomes from legitimate enterprise and speculation 
correspond roughly to social service. It has been recognized 



§11] 



INCOME FROM PERSONAL SERVICES 



377 



above that there are many grades of chance, of speculation, someanti- 
and of enterprise. The extreme cases are bald crimes and are ^*^'^\ . 

^ . speculative 

punished as such. Over some men that never directly break gains 
the law there always hangs a suspicion of guilt. It is the 
purpose of the law to make dishonesty unprofitable, but how 
imperfectly it does sol There are many cases of chance 
gains where the lucky man without social service legally en- 
joys his fortune. The law must be framed in broad terms, and 
cannot provide for every case. It may broadly forbid 
lotteries whose evils clearly exceed their benefits. But what 
would be the effect of taking away reward for the discovery 
of a gold-mine, even though sometimes it is awkward stum- 
bling, not industry, that reveals the veins of metal 1 Society 
has studied that question in the past ; even now changes are 
being made in the laws; and in their turn the citizens and 
legislators of the next generation must decide the question. 
It is always under consideration. 

Are the rewards of the successful enterpriser greater than Reward and 
he deserves? How shall it be judged what he deserves? The enterprise 
answer is in the form of a question, Could society have the 
service without the reward? Society may be thought of as 
hiring the services of the efficient business man at the lowest 
price. Does it wish the services of Cornelius Vanderbilt in 
organizing a great system of railroads, of Andrew Carnegie, 
of Pierpont Morgan? What can it get them for? It must 
appeal not only to their love of money but to their love of 
power. Large services and large results can be bought only 
with large rewards. The shrewd enterpriser is not to be 
paid with abstract social gratitude. He is not to be tricked, 
as is a Chinese god, with tissue-paper gold. 

But in many ways fortunes appear to grow without social unmeasured 
services, and sometimes with social harm. Russell Sago, the 
noted capitalist (who should know something of Wall Street), 
in speaking of the greatest of American corporations, said : 
" They dominate wherever they choose to go. They can 
make and unmake any property, no matter how vast. They 



gains of 
vast wealth 



378 



INCOME AND SOCIAL SERVICE 



[CH. 39 



Antisocial 
use of rare 
ability 



General 
social result 
of reward- 
ing talenv 



can almost compel any man to sell out anything, at any 
price." Henry Clews, the well-known New York banker, 
said of a certain group of financiers: "Their resources are 
so vast that they need only to concentrate on any given 
property in order to do wath it what they please. . . . 
There is an utter absence of chance that is terrible to 
contemplate. This combination controls Wall Street almost 
absolutely. With such power and facilities it is easily con- 
ceivable that these men must make enormous sums on either 
side of the market." 

2. The high pay of rare abiliiy and skilled labor reflects 
in general a high, social service. The large income of some 
men reflects service to a narrow class, not to society as a 
whole. Lawyers as a class aid in maintaining right, but a 
corporation lawyer may get enormous fees for defeating 
just public claims ; a skilful criminal lawyer may grow rich 
aiding the guilty to escape justice. Other service ministers 
to the whims, follies, and vices of the men who pay the bill. 
Such a service is "social" in a mean sense, corresponding 
to the low standards of desire in that social group. But 
what of the high rewards of skilled service ministering to 
worthy ends? Such favorites of fortune as Jenny Lind and 
Patti have received five thousand dollars for a single con- 
cert. Is this because they are the lucky possessors of a rare 
gift, or because they perform a social service deserving such 
reward? Certainly many of their auditors get what they 
want and believe they are getting the worth of their money. 

In general the legal right of everyone to get the highest 
pay he can in a free and open market is essential to the 
calling forth of ability. In a particular instance it is pos- 
sible that the service would continue if one half or more 
of the income were confiscated by the public; but such 
a personal discrimination would introduce an arbitrary 
and demoralizing uncertainty into the problem. Who can 
tell how far the exceptional money rewards have in- 
spired to the highest cultivation of great genius and 



§IIJ INCOME FROM PERSONAL SERVICES 379 

of many minor talents? In a broad but very true sense, 
therefore, it appears that high personal achievement, large 
economic reward, and large social service are connected. 

3. The loiv income of unskilled labor seems to fall short social 
of its social service. This does not refer to the feeble-minded ^^'^'^^ °* 

manual 

or utterly inefincient, but rather to honest, industrious, workers 
"day-laborers," and to the low-paid manual workers in 
field, on railroad, and in factory. Their service is essential 
to the existence of society as it is, to all the higher arts, to 
the sciences, and to the amenities of life ; their tasks are the 
roughest, most painful, most dangerous ; yet their pecuniary 
rewards are the lowest. There is such a unity in society that 
each more fortunate man is dependent on the services of 
the humbler laborers who make up a large part of society. 
According to the breadth of social sympathy their claims 
seem more or less urgent. 

There is a vaguely recognized and growing conviction xheprob- 
that these hew^ers of wood and drawers of water should ,!°*°„:„„ 

increasing 

enjoy a larger income. But how are they to get it? How their reward 
is society to grant it to them? They get what they can 
under the competitive conditions, they get what their service 
is worth in the market. Are the conditions of the competi- 
tion fair? If not, what will be the effect of a change? If 
they get more, others will get less ; and with what result ? 
However great the wish for better things, the attempt to 
change conditions fundamentally in a forcible and artificial 
way is both dangerous and foolish. Improvement must 
come through the cooperation of many indirect agencies 
gradually changing the nature and direction of the deeper 
economic forces. 

4. The services of each are being measured and paid for impeifect 
by each and all. In two ways society is putting its valuation J^^^'^^^^j 
on the economic services of other members of society: first, estimates oi 
by law, or formal social convention ; secondly, by individual ^^^'^'^^ 
estimates. By formal law is determined what institutions 

shall be continued. If the class of property owners is con- 



380 INCOME AND SOCIAL SERVICE [CH. 39 

sidered worthy of this reward, the institution of property 
will be continued; if not, it will be altered or destroyed. 
These decisions are made imperfectly, but as well as men of 
limited intelligence and honesty can make them. If men 
were more capable in both these ways they would enact 
better laws. Again, individuals are putting their estimates 
on others in bidding for services to minister to wisdom and 
virtue or to ignorance and vice. If there is to be a much 
juster estimate of social service, there must be wiser men 
in society. 
The ideal Does the world owe each man a living? No; on the con- 

trary, each man owes the world his services in exchange for 
his living. The pauperism of spirit that consists in taking 
something for nothing is found in every rank of society that 
enjoys the blessings of progress without giving its best 
services in return. The ideal of a better adjustment of re- 
ward and service grows in the minds of men. Social evolu- 
tion, shaped by this changing ideal and by accumulating 
experience, will bring into closer relation the social services 
and the economic rewards of men. 



of social 
service 



CHAPTER 40 
WASTE AND LUXURY 

§ I, WASTE OF WEALTH 

1. The accidental destruction of wealth is a loss to the Loss of 
owner, rarely ivith benefit, on the whole, to others. In the ^eaithinan 

. p , , p . . . isolated or 

consumption of AveaJth the loss of its utility is accompanied anexchang- 
by the gratifying of wants; in the destruction of wealth iJ^geconomy 
utility is lost without the gratifying of wants. In a simple 
society, without exchange, the result of such a loss is evident. 
If food is destroyed, men suffer from hunger or gratify 
appetite less perfectly, if clothing is destroyed, they are 
cold ; if houses are destroyed, they have no shelter. Likewise, 
if the self-sufficing family on a farm loses wealth by fire or 
storm or blight, its economic environment is made less fitted 
to gratify wants. In the conditions of our society, where 
goods are exchanged, the result appears to be different. The 
need to replace the lost goods makes a demand for special 
kinds of labor or goods. There may be, therefore, an immedi- 
ate benefit to some, which obscures the corresponding loss to 
others. If a part of the income of the loser must be diverted 
from other uses to replace the wealth destroyed, those from 
whom he would have bought suffer an unexpected falling off 
of their sales, and he has himself gained nothing. The net 
result is a loss of wealth and gratification to the community 
ns a whole. 

There is a real exception where the accidental destruction 
removes some social difficulty. The great fire in London 
and the great fire in Chicago resulted in wonderful im- 

381 



382 



WASTE AND LUXURY 



[CH. 40 



Intentional 
destruction 
of wealth 
by the 
owner 



provement. When an old city is built almost entirely of 
wood, each owner may think it to his interest to keep the 
old buildings. A great fire sweeps them all down and com- 
pels the rebuilding of the city on a new and higher standard. 
But the usual social result of accidental destruction is a loss. 
It is a use of wealth without a fulfilling of the purpose of 
production, the gratifying of wants. 

2. The intentional destruction of wealth hy the owner, 
to make trade good, benefits neither himself nor others. The 
case in mind is one where there is full choice between 
keeping or losing the good, not such a case as the throwing 
overboard of a part of the cargo when the ship is in danger 
of sinking, in the hope thereby of saving the rest, or as the 
blowing up of buildings to prevent the spread of a fire. In 
such cases the destruction is inevitable without man 's action ; 
he merely tries to minimize it. The case in mind is the de- 
liberate destruction of wealth that might be kept for use. 
One labor leader, for example, boasted that when he drank 
pop he always broke the bottle "to make trade good" by 
helping the glass industry. The refuting of this fallacy is 
one of the time-honored tasks in political economy. There 
is, it is true, an increase in the demand for glass and glass- 
blowers' labor, but without an increase in gratification ; but at 
the same time there is a decrease in the demand for other 
goods which would afford additional gratification. The prov- 
erb, old in Shakespeare's time, runs, "Nothing can come of 
nothing." MTiat is spent for one purpose cannot be for an- 
other ; ' ' you cannot eat your cake and have it too. ' ' A given 
income can be spent in one of many ways, but not in all ways 
or even in two ways at once. It is a question of this or that. 
At the same moment that the demand for pop-bottles is in- 
creased, the demand for other things is decreased, possibly 
that for pop-corn or pop-guns or Populist papers — who can 
tell ? Such a form of benevolence is a mistaken, uneconomic 
attempt to provide labor for one man by taking it from 
another. 



§1] WASTE OF WEALTH 383 

If the advocate of wealth-destruction would be consistent, 
he should break, not merely the pop-bottle, but the water- 
pitcher and the table as well ; he should make a bonfire at 
least once daily of his clothing, his house, and its furnish- 
ings ; he should advise blowing up the steamboat and rip- 
ping up the railroad when they have carried a single load of 
passengers. Thus, when all men were naked and starving, 
and civilization had sunk to savagery, trade would have been 
made as "good" as, by the policy of destruction, he could 
ever hope to make it. 

3. The intentional destruction of wealth owned by other intentional 
persons is falsely thought to benefit trade in general. The of^^gf?" 
cases referred to are not acts done with criminal motives, but wealth 
those done with a view to the public interest. If one sets 
fire to the property of another, seeking revenge or plunder, 
he is guilty of the crime of arson. But what shall be said of 
volunteer firemen that let an old house burn down to provide 
labor for carpenters and "to make business good"? The 
duty of firemen is to put out fires, no matter what the 
building is ; but they choose sometimes to be ministers to 
the social interest as they interpret it. The more spent for 
carpenters' work out of any income, the less can be spent 
for other objects. It is true, however, that if in a small town 
the money to rebuild is borrowed from a distant loan or 
insurance company, there is an increase in employment in 
that town for one season ; and that is as far as most men try 
to carry their economic analysis. Let the student carry it 
further. 

Servants sometimes excuse the breaking of dishes and The seen 
furniture on the ground that it makes work, and that the ^'' ^/ 
employer can afford it. But income is thus diverted from 
other expenditure, either for production or for consumption. 
In the light of the theory of wages, it would appear that 
carelessness reduces the servant's own efficiency, and in the 
long run the loss comes, in part at least, off the wages of that 
particular servant. Bastiat's discussion of the broken win- 



384 



WASTE AND LUXURY 



[CH. 40 



The waste- 
ful use of 
wealth 



Waste in 

public 

outlay 



dow-pane is often and deservedly quoted. What is seen is a 
certain immediate benefit that the glass-maker and glazier 
get; what is not seen is that the power to expend an equal 
amount for other things is thereby lost by the owner of the 
house. 

4. The destruction of unnecessarily large value to secure 
a given gratification is not economically sound. The careless 
use of wealth to secure an inadequate result is likewise 
justified as "making trade good." The blunder that com- 
pels the rebuilding of a wall in a rich man's garden is an 
occasion for congratulation to those who see in it a happy 
provision of work for the unemployed. It is easy to forget 
that the proper use of goods is the final step in production. 
According as goods are well or poorly used, the production— 
that is, the real income or gratification they afford — is large 
or small. Differences in skill in the use of wealth are great. 
A French cook, we are often told, can make a palatable soup 
from what goes from the average American kitchen into the 
swill-pail. Waste in the use of goods is more likely to be 
found in new countries where wealth comes more easily and 
necessity does not enforce frugality. 

The praise of waste implies the error noted in the pre- 
ceding propositions. Deliberately securing less than the 
maximum result from wealth is merely a minor degree of 
the intentional destruction of wealth. The mistaken view 
is essentially that of the opponents of labor-saving machin- 
ery. It may be true, if the interests of a small class of workers 
or of tradesmen for the moment are looked at ; it is false, if 
the interests of society as a whole be considered. Far more 
of wisdom lies in the proverb, "A penny saved is two 
earned." The economic use of wealth as surely adds to 
wealth (and, ultimately, to the income of society) as any 
other mode of production. 

Some government expenditures, as for river and harbor 
improvements, are sometimes favored, not because their im- 
mediate purposes are good, but because they "make work" 



5 II] LUXURY 385 

and "distribute money" throughout the country. This 
money comes from taxation, and no matter what the system 
of taxation, the burden falls on some one, reducing the in- 
comes at the disposal of the people to expend for objects of 
their own choice. If the work is not worth doing for itself, 
the collection of money in small amounts from many tax- 
payers and its expenditure as a large sum in one locality 
results in a net loss to society as a whole. Where the result 
is worth something, but not enough by itself to justify the 
expenditure, the fallacy of the destruction of wealth is 
present in a smaller degree. Examples are seen in the ex- 
treme use of pensions and in some public subsidies. 

5. The supposed benefits of destruction and waste are The fallacy 
dueto a narrow and incomplete view of the question. Let "^^^^^e 
us restate the ideas that have been touched upon. In many 
cases it is possible that one person may benefit by another's 
mishap or folly in the use of wealth. The complex inter- 
relations of men in society make this inevitable. But, to ap- 
preciate the final effects of such action upon society, one 
needs but to go back to the essential thought of wealth and 
its purposes. As the average efficiency and bounty of the 
world fall, so fall the income and welfare of men. As 
it rises, the social and economic levels rise also. Every kind 
of economic wealth has potentially two kinds of uses: to 
gratify wants— thus fulfilling its destiny— or to be con- 
verted into higher and more efficient agents— consumption 
or production. That the possibilities of the latter are bound- 
less is overlooked in the fallacies here criticized. An efficient 
world would be the result of "economy" and saving; a 
wasted and used-up world, the result of the fallacy of the 
destruction and waste of wealth. 

§ II. LUXURY 

1. Luxury, while variously defined, involves always the Luxury 
thought of great consumption of wealth for unessential 

25 



386 



WASTE AND LUXURY 



[CH. 40 



Krtrava- 
gance "to 
give em- 
ployment" 



The fallacy 
of luxury 



pleasures. It is not possible to define luxury absolutely; it 
is a relative term. Those opposed to it condemn it in their 
definition of it, as, for example: "an excessive consumption 
of wealth," or " devoting a relatively large amount of 
wealth to the satisfaction of a relatively superfluous want." 
Those who take a more moderate and favorable view say : 
"It is the enjoyment of forms of wealth not obtainable by 
the mass of men." The difficulty in the definition as well 
as in the problem of luxury is that it involves a mixture of 
economic and of ethical questions. 

2. Luxury is erroneously justified hy some as giving 
employment to labor. Typical instances are extravagant 
dress and elaborate balls where fine and costly flowers, dec- 
orations, music, coaches, require the expenditure of a large 
amount of money. It is said of the Empress Eugenie, wife 
of Napoleon III, that, in order to help the glove industry of 
France, she wore no pair of gloves more than once ; in order 
to help other French industries, she purchased many silks 
and laces. It is a very comfortable doctrine to some people 
that the oftener they change their dress, the greater bene- 
factors to society they are. A few years ago the "Bradley- 
Martin ball" was given in New York city. It was possibly 
little more elaborate and expensive than many another ball, 
but it chanced to be a dull time for news and the papers all 
over the land gave columns to its discussion. In the many 
interviews with ministers and business men, the thought 
appeared over and over that the ball had at least the merit 
of giving employment to labor. 

The fallacy of this is essentially the same as that in the 
argument for waste and destruction. From the fact that 
these particular tailors, musicians, and florists would have 
less employment if this ball were not given, it is falsely 
concluded that, but for this ball, this particular income, or 
capital, would not be used at all. The average of employ- 
ment in those special industries which minister to luxury 
is the result of and is determined by the average level of 



§1IJ LUXURY 387 

demand. There are more caterers and florists in Ithaca 
than in Hayt's Corners. A more than ordinarily j,'ay season 
gives unusual profits to these enterprises, and it is true that 
an abrupt and extreme falling oif in demand would cause 
them large losses, and leave many workers lacking employ- 
ment fur that one season. But, if this limited demand 
became usual, capital and labor would shift to the other 
industries to which expenditure had shifted. Other modes 
of expenditure than twenty-five thousand-dollar balls are 
l)(<ssible, as, for example, twenty-five thousand-dollar public 
libraries. Mr. Carnegie takes his dissipation in that form. 
That gives employment also ; not less does investment in new 
houses, in new railroads, and in new factories. More em- 
ployment of a particular kind of labor is caused in one case 
than in another, but not more employment of labor as a 
whole and on the average. 

3. If all extreme luxury ceased, men of means would Results of a 
improve durahle agents more or ivould qive more or would ^^^^^^ . 

' , "^ . '^ , change in 

take more leisure while producing less. The question of standardsof 
luxury is most difficult when put thus: What would happen ^^°^ 
if everybody began suddenly to live on the simplest food 
and to confine himself to the bare necessities of life? A 
sudden change of this sort is almost unthinkable, but if it 
took place, all the factories and agents used for non-essen- 
tials would lose their value at once. A great industrial crisis 
would folloM', as industry would have to adjust itself 
abruptly to an unprecedented standard of desires. What 
would happen if that standard continued would vary as 
human nature varies. There might follow increase of popu- 
JHtion, or a heightening of the efficiency of such agents 
as were of use, or, more probable than all else, a progressive 
lightening of labor, a use of the surplus of energy in study, 
rest, and recreation. Tt is, of course, illogical to suppose 
that with limited desires for the objective goods of the 
world there would continue undiminished efforts to produce; 
goods and to save for future superfiuities. In actual life 



388 



WASTE AND LUXURY 



[CH. 40 



Luxury as 
an incen- 
tive to 
progress 



Happiness 
and the 
simple life 



changes of standard occur gradually. Economizing in ma- 
terial things by simpler living makes possible not only the 
increased efficiency of productive agents but the increased 
enjoyment of immaterial goods. 

4. The defenders of luxury claim that it is the great 
incentive to progress. It is undoubtedly true that a dead 
level of conditions is unfavorable to the progress of society. 
There must be in society some motive for emulation and am- 
bition after the bare necessities of life are provided. There 
is therefore much strength in the defense of luxury. Neces- 
sities, strictly understood, are things absolutely essential 
to life and health. No hard line can be drawn between 
necessities and comforts, between comforts and luxuries. The 
level rises; it is a trite and true saying that the luxuries of 
one age become the necessities of the next. The rise of the 
bath-tub in the nineteenth century is an epitome of the 
progress of civilization in that period. The free baths in 
our cities surpass the hopes of the wealthy of a century ago. 
Even the meaner motives of envy may have their social 
function. The lower social grades, emulous of the higher 
standard held before them, labor with greater energy. The 
successful and capable, not content with necessities, continue 
to give their efforts to production. The destruction of the 
motive of luxury before the development of a substitute 
in a higher social conscience, would be paralyzing to industry. 
Luxury in a moderate measure may be defended by the same 
arguments as those for private property. True as this 
view may be in many cases, in others it seems directly op- 
posed to the facts. Let us look at the economico-moral 
questions involved from the side of the individual who is 
indulging in luxury, and from that of the society in which 
he lives. 

5. As a question of consumption luxury involves for the 
individual hath an economic and a moral problem. The 
economic question is, Does luxury enhance the man's real 
income? Does a greater expenditure on himself give him a 



§11] 



LUXURY 



389 



larger sum of gratification in life than a moderate expendi- 
ture would give? Ostentation has its penalties. Undue 
striving after effect defeats its own purpose. This is the 
cold fact of experience, not a speculative proposition. To 
get back to the fundamental principle: gratification results 
from a harmonious relation between man's nature and the 
world. Life loaded with too much luggage staggers under 
the burden. The tired faculties of the Sybarite cease at 
length to respond to natural pleasures. When the senses 
are robbed of their fineness, youth grows blase, mature man- 
hood is ennuied, life is empty. The praise of "the simple 
life" has lately been heard in a quarter whence such 
counsel does not usually come. In gay Paris, a wise pastor 
has made one of the most beautiful and rational pleas 
for plain and sincere living that society has heard since 
the time of the stoic philosophers. The word is needed. 
With the growth of incomes grows the strain to reach the 
self-imposed standards of frivolity. Insanity and suicide 
are on the increase. The stress of modern life makes men 
yearn for the simpler joys. Happiness dwells not outside of 
men ; they must seek it within. 

An economic failure, luxury is likewise in most cases a 
moral failure. Morality has to do with others; the social 
aspect of luxury is its effect on other people. The mere 
spending of a large income in selfish indulgence absorbs all 
the energies and interests of some men and women. Not 
only happiness in the narrow sense, but self-realization, is 
to such lives impossible. Those absorbed in display can give 
no due measure of thought to social obligations. A society 
made up of self-absorbed and self-centered individuals is a 
selfish society, foredoomed to decay. 

6. The larger moral prohlem involved in luxury is con- 
7iccted with distrihution or the justice of the income, rather 
than with consumption or the spending of the income. The 
individual effects of luxury broaden thus into the larger 
social effects. Most of the enemies of luxury condemn all 



Luxury vs. 

social 

welfare 



Luxury 

generally 

condemned 



390 



WASTE AND LUXURY 



[CH. 40 



Increasing 
social uses 
of wealth 



Justice of 
the large in- 
some 



expenditure of wealth above a very moderate sum, declaring 
that it is "unjust" for one man to have much while others 
are in poverty. This communistic doctrine pervades the 
teaching of many moral teachers, pagan and Christian. In 
many ways a public opinion can be developed to disapprove 
and condemn ostentation. Frivolous display becomes bad 
taste. Flaunting riches meet the public frown. The spend- 
ing of income for dress and display has never been success- 
fully forbidden by law. The Middle Ages are full of futile 
sumptuary laws which sprang from the envy of the nobles 
for the wealthy merchants. The growth of good taste may 
do what formal law found impossible. 

The use of wealth in these days is taking more social 
directions. It turns from dress toward education, art, music, 
and travel ; then ceases to be applied merely to self and 
family, and benefits the community. Nowhere and never 
before has this movement gone so far as in America. An- 
drew Carnegie, with his gifts of millions annually to public 
libraries; Peter Cooper, founder of the People's Institute; 
Ezra Cornell, the patron and prophet of the modern type 
of higher education— are citizens of a kind better known in 
this country than in any other. 

The immorality of luxury rests in most minds on the 
conviction that it is unjust that any one should have so 
large an income to use. The question of luxury leads back 
to the question of distribution : Has the man honestly gained 
his wealth? If so, he may spend it with good judgment or 
poor, with good taste or bad, but, so long as he does not injure 
others in the spending of it, there is much vagueness and 
confusion in the talk of "justice" or "injustice." Each 
must in large measure be his own judge of the wisdom of 
expenditure. Luxury is not always a question of wealth. 
Every person of moderate income has relatively superfluous 
and expensive tastes. One spends more for music than many 
a millionaire does ; another more for books. How many col- 
lege students' budgets could pass the censorship of Hetty 



^11] LUXURY 391 

Green, reputed to be the richest woman in America? If i^gai 
expenditures were regulated by the public, few persons oni«uiy° 
would be within the law. But whatever the goods that are inadvisable 
bought, if income is unjustly acquired, if its distribution 
is by rules that do not give the best possible approach to 
social service, there may well be talk of injustice. There is 
need of better standards of taste and judgment in expendi- 
ture, but not of sumptuary laws. If there is any legal 
change, it should be rather in the law of property. 



CHAPTER 41 
REACTION OF CONSUMPTION ON PRODUCTION 



Essential 
mark of the 
consump- 
tion of goods 



Consumers' 
choice as 
influencing, 
value 



§ I. REACTION UPON MATERIAL PRODUCTIVE AGENTS 

1. Economic consumption is the enjoyment of the utili- 
iies which wealth is capable of affording. All wealth looks 
toward consumption. To take away the prospect of the en- 
joyment of goods is to take away all their value. Consump- 
tion involves generally the using up of a thing. Food 
is consumed quickly, clothing more slowly, and houses wear 
out after many years. The using up is, in some cases, due to 
the forces of nature, and is not hastened by enjoyment. 
A house goes to ruin more rapidly if uninhabited than with 
a careful tenant; clothing is destroyed more quickly by 
moths than by wear. The use of many goods that give 
esthetic pleasures, as art, painting, sculpture, and the en- 
joyment of fine scenery or of beautiful building sites, does 
not destroy the things that afford the pleasure. The idea 
that all value originates in labor has led to false views on 
this question. The essential mark of consumption is the 
using of the income as it arises, not necessarily the using 
up of the material agents that afford it, though this fre- 
quently occurs as well. 

2. The kind of consumption affects the value of material 
agents. Each buyer helps to determine the use of produc- 
tive agents. The control of purchasing power means the 
potential control of industry to that degree. It was ne- 
cessary in discussing the enterpriser to recognize that the 
buyer eventually dictates the direction of industry; the 

392 



§1] REACTION UPON MATERIAL PRODUCTIVE AGENTS 393 

enterpriser seeks to produce that for which there is most 
demand. A change of taste affects the value of natural 
agents. An increase in the demand for meat affects the 
value of wheat and potatoes, and also the land used for 
producing them. A change in the national diet may be 
equivalent to the discovery or to the destruction of half 
a continent. If one chooses to drink wine instead of buying 
statuary, he increases the value of vinej^ards and decreases 
that of marble quarries. If one drinks beer, he bids for 
barley; if he eats candy, he may be offering a bounty for 
beets. Therefore, choosing vines or violets, pictures or pret- 
zels, each with his nickel helps to determine what shall be 
produced. 

The distribution of wealth thus affects the value of agents, inventions 
The wealthy spend relatively more for luxuries, the poor '^"^°cing 
for food and other essentials. Where wealth and incomes 
are very nearly equally distributed, the demand of different 
families will be for much the same kinds of goods. If 
there were no rich men, the demand for vineyards producing 
fine wines would be less. The very best qualities of goods 
take on the highest prices when there is a small, but very 
wealthy, class of purchasers. 

Inventions often shift demand, and value follows. The 
invention of the bicycle with pneumatic tires, coincident 
with the adoption of electric traction for street cars, reduced 
the price of horses between 1890 and 1895. This doubtless 
was a factor in agricultural land values at that time. This 
change was sudden, extreme, and temporary, and there has 
since been a gradual adjustment and a return to the former 
values. 

3. The production of the next period may he 7'adically consumers' 
affected by the use now made of agents. Some consumption ^g^^fj^^ 
takes the form of using up and reducing the stock of wealth, productive 
The demand for lumber causes the disappearance of the ^""^^^^ 
forests, whereas the demand for oranges stimulates the plant- 
ing of orange trees. The reckless exploitation of natural 



394 EEACTION OF CONSUMPTION ON PRODUCTION [CH. 41 



Consumers' 
choice as 
affecting 
wages 



The con- 
sumer's re- 
sponsibility 



resources leaves society poorer. Great herds of buffalo were 
slaughtered to get the hides, Avhich were of comparatively- 
slight value. Rich land has been exhausted to get a few 
harvests. 

War is a use of wealth for ends believed at the time to be 
necessary and believed to forward social welfare better in 
the long run than would dishonorable submission; but it 
causes misery and leaves industry prostrate. The forms 
taken by saving are affected by the choice of expenditure. 
In war the savings of individuals are given to the govern- 
ment and used for destructive purposes. The lender parts 
with his wealth and society uses it up. While the lender 
has a claim on the industry and on the remaining property 
of the community, society as a whole is the poorer. If the 
savings had taken the form of public buildings, libraries, 
railroads, and factories, the wealth and income of society 
as a whole would have been enhanced. 

4. The kind of consumption affects the wages of the 
various classes of labor. That an increase in the supply of 
a given grade of labor reduces its wages and encourages its 
use, and vice versa, is a truth that became familiar in the 
study of wages. An influence also is exerted from the side 
of goods upon the price of labor. A shift of demand from 
one kind of goods to another depresses the wage of the one 
kind of labor and raises that of the other. A low grade of 
labor that performs only simple tasks, and those but badly, 
is injured if demand shifts to better products. Back of the 
sweat-shop shirt is the problem of the inefficient worker. 
Progress takes place by the effort of labor to increase its 
efficiency and to move into higher paid callings, and at the 
same time by the desire of the purchaser to buy as good a 
quality as he can. 

Every buyer then determines in some degree the direction 
of industry. The market is a democracy where every penny 
gives a right of vote. It is the thought of the society called 
"The Consumers' League" that through purchases, pressure 



^11] REACTION UPON EFFICIENCY OF WORKERS 395 

may be brought to bear upon the employer to provide better 
conditions of worlv. The members of The Consumers' 
League refuse to buy goods not made under sanitary condi- 
tions. Undoubtedly there is here a great economic force 
which an enlightened public opinion, even without a formal 
association, can make in large measure effective. Every 
individual may organize a consumer's league, leaguing him- 
self with the powers of righteousness. Will he read a yellow 
journal or a pink or a white one ? A nickel or two will buy 
either. He has a dollar ; will he go to the theater or buy ten 
dishes of ice-cream? He decides to buy a book, and more 
type and paper are made, and more printers are employed; 
he subscribes to foreign missions and Christian workers 
penetrate farther into Africa. Every purchase has far- 
reaching consequences. You may spend your monthly al- 
lowance as an agent of iniquity or of truth. You cannot 
escape a choice even by burying the money, for that is 
either a demand for gold or a gift to the issuer of paper 
currency. 

§ II. REACTION UPON THE EFFICIENCY OF THE W^ORKERS 

1. All consumption works some temporary change in the instinctive 
consumer, making him a more or less efficient producer. '^^^^^^^ 
]\Iost consumption goods are used to gratify a wish of the welfare 
moment. Many actions are governed by impulse rather than 
by reason ; but in general this impulse is in harmony with 
the interests of efficiency. In primitive society instinct and 
appetite must generally have been safe guides. Pood not 
merely appeased hunger and gratified the palate, but it gave 
strength. Sensations of cold, hunger, and thirst were de- 
veloped by nature to stiniulate men to do the things that 
helped them to survive. In primitive societies there are few 
chances to seek plea.sures that are not'favorable to efficiency. 
In the struggle for existence the more efficient tribes survive, 
and those that develop many a])n()rmal tastes must i)erish. 



396 REACTION OP CONSUMPTION ON PRODUCTION [CH. 41 



Choice of 
foods 



Of drinks 



But the conditions of modern life are more complex, and 
temptations beset men on every side. Tastes are pampered 
and appetite is gratified at the expense of later welfare. 

2. The physical efficiency of the worker is conditioned 
on wise consumption. Chemists and physiologists are telling 
now in accurate terms how the nutritive values of foods 
differ. Food values are not measured by the pleasure af- 
forded the palate. The wide variety and greater choice now 
possible, even to the modest purse, make the chance of error 
much greater than in simpler conditions. This subject, al- 
ready touched upon in the sections on the efficiency of labor, 
deserves further notice. From youth to age, the foolish 
choice of goods yields its harvest of ultimate misery. 
When babies are fed on crackers dipped in coffee, or, as 
among the Italian immigrants, on stale bread dipped in sour 
wine, there is a poor foundation laid for a vigorous man- 
hood. Rich and poor cook too much for taste and too little 
for nutrition or digestion. Much cooking is still done in 
ways fit only for our grandfathers who had cast-iron 
stomachs and worked in the open air. Culinary methods 
have not been adapted as yet to a sedentary life. 

Drinking tempts some men not only by taste, but by the 
appeal to sociability ; to other coarser natures the joys of 
Bacchus offer the one hope of exhilaration. The pleasure 
from alcoholic liquor may at the moment outweigh the 
cost in money, but a diseased appetite forbids any reckoning 
of the vast psychic cost that follows. The coin paid for 
the drink is the beginning of the expense; misery, disgrace, 
degeneracy, and bestialty too often are the unreckoned 
items. 

Clothing is primarily for ornament, secondly for physical 
comfort. That was the historical order, and it is the logical 
order in most minds to-day. How badly the two needs are 
harmonized ! No wonder that the savage suffers in adopt- 
ing civilized dress. Travelers describe the African potentate, 
attired in a high hat and a bracelet, striving to outshine 



§n] REACTION UPON EFFICIENCY OF WORKERS 397 

his rival resplendent in full-dress coat and a palm-leaf fan. 
Civilization is making: headway there; but the student of 
primitive peoples finds one of the important causes of 
their decay to be their bad judgment in adopting civilized 
dress, unsuited to their customs and climate. A mistake is 
made likewise by workers in physical tasks in imitating the 
dress of the wealthy and professional classes. The dress of 
the higher classes often is chosen because of its unsuitable- 
ness for an active worker. It serves thus to mark its wearer 
as one engaged in delicate tasks or as a person of leisure. 
Possibly, therefore, because of their strong social ambitions, 
the manual workers in America more than elsewhere adopt 
a costume that is not sensible or sanitary. 

3. The intelligence of the worker is affected by the form Reaction of 
of his eniovments. This does not refer to the use made of enjoyment 

.„ , ,. ., ,, upon the 

spare tmie tor regular study m night schools, correspon- inteuigence 

dence schools, vacation work, but to the use of time when 
seeking recreation. The choice of recreation reacts upon the 
nature of the man. Will he read a book or play billiards? 
In proper proportions both may be good, in excess both are 
evil. Liking realism, docs he read HoAvells or the blood- 
curdling serial entitled "Piping the Mystery"? Does he 
devote his spare hours to the "Scientific American" or 
to the "Police Gazette"? At the moment there may be as 
much pleasure in one as in the other (and one might add, 
in Hibernian phrase, "Yes, and more too."). Does he 
enjoy music, the theater, or the cheaper attractions of 
Coney Island and the Bowery? Is his recreation permeated 
with a certain intellectual ambition? There may be just as 
much momentary joy in one choice as in another, and life is 
shaped by the direction of one's enjoyments. Much depends 
on the natural bent; some natures incline to the healthy as 
the plant grows toward the sun. With most characters much 
depends on the influences of neighborhood life; thus the 
boy's clubs and college settlements of the cities, the schools 
and playgrounds of the villages, are tending to surround 



398 EEACTION OF CONSUMPTION ON PRODUCTION [CH. 41 



Reaction 
upon the 
character 



child life with healthier conditions, that will mould it into 
better social habits. 

4. The form of flic worker's expenditures affects his in- 
dustrial virtues. This is not a moral lecture; it is a look at 
the economic side of the subject. There are some moral 
qualities, however, that are closely connected with efficiency, 
while others are not. Some individuals are corrupt in pri- 
vate personal relations, but "square" in business dealings. 
But usually there is some connection between the two, and 
under modern conditions this is becoming closer. Fitness 
for daily tasks is affected by the daily thoughts of the 
worker. Sordid and foul thoughts, like an internal malady, 
sap the economic efficiency of the worker; clean, bright 
thoughts act as a tonic. Drink, gambling, fast living, unfit 
men for positions of trust, while many pastimes leave the 
moral nature cleaner and stronger. Few can live a double 
life— honorable, conscientious, and exact in one part of 
the day, and corrupt in another. Dr. Jekylls and Mr. Hydes 
are not often found in real life. The habitual train of 
thought in leisure hours possesses and controls the man 
throughout his work. It is said that "A man is what his 
work makes him," but it is equally true that a man's work 
tends to become what he is. A man fit for a higher kind of 
work rises to it in the usual order of things; but no matter 
how humble the task, it partakes of the worth and whole- 
someness of its doer. 



§ III. EFFECTS ON THE ABIDING WELFARE OF THE CONSUMER 



1. Man and his welfare are the end and aim of the eco- 
nomic process. The starting point of industry is wants; the 
goal is welfare. Momentary gratification is only a v/ay- 
station, not the journey's end. Too often, in economic rea- 
soning, things are looked at from the employer's point of 
view. The older writers, such as Rieardo and Mill, were 
inclined to take what John B. Clark has called the "feed 



s^ III] 



EFFECTS ON ABIDING WELFARE 



399 



ginal appli- 
cation of 
income 



and work" view,— the view that the workman is merely an. 
agent of production, a means to an end; tiiat his food, the 
same as coal for an engine, is to be thought of rather as 
employer's cost than as consumer's gratification. But, in 
the broader view, the welfare of men as men is the subject 
most worthy of economic study. The workman's food is to 
gratify his hunger, primarily ; not merely to make him a bet- 
ter working machine. This reverses the order of the older 
reasoning. The use made of the income is itself a kind of 
production — its last stage. Is the process, on the whole, 
worth while? This can only be judged by finding whether, 
on the whole, the welfare of man has been furthered. 

2. An income yields the maximum gratification when it The mar- 
is apportioned among goods so that their marginal utilities, 
as nearly as possible, are equal. Even a small income is 
capable of many applications. The choice lies among nuuiy 
thousands of articles. Utility varies not only according to 

the kinds of good, but according to the varying quantities 
of each. Every moment, therefore, the conditions of a choice 
are changing. The best use of income forbids the purchase 
of an additional unit of any good unless it affords the high- 
est gratification obtainable, at the moment, at an equal price. 
Various circumstances prevent the exact application of this 
rule. Expenditure is a matter of habit, in large measure, 
rather than a matter of judgment. The knowledge needed 
for a rational choice very often is lacking. Appetites change, 
making unwise the old purchases, yet men go on buying 
the same things in the same proportions simply because 
a readjustment that would give greater gratification requires 
thought. Finally, the best economic adjustment must con- 
form to the abiding physical and moral welfare of the user, 
not to a temporary impulse; and such a choice is far more 
difficult than that of the temporary good. 

3. Progress takes place where new wealth gratifies mar- Progress 
ginal wants as intense as those of the preceding period. If refinement 
the utility of every kind of goods decreased uniformly as of desires 



400 REACTION OF CONSUMPTION ON PRODUCTION [CH. 41 



Wealth a 
means to 
Jiving 



Variety and 
harmony in 
the choice of 
goods 



wealth increased, desire would steadily decline in intensity. 
But old wants vary and new wants develop with prosperity. 
Desire grows by what it feeds on. Ambition passes on to 
other and higher peaks. The direction of the individual 
man's life thus is determined by the expenditure of his in- 
creasing income. Wealth makes possible a new adjustment 
of life, a new character, both in the individual and in the 
society. 

The thought that needs emphasis in this connection is that, 
while production and consumption are separable in thought 
and distinguishable in practice, they are not opposed in their 
ultimate purpose. The highest fruits of production are in 
the lessons of sacrifice and discipline, and in its opportunities 
for experience and self-expression. The best result of the 
consumption of wealth is not the gratification of appetite, 
but the strengthening of the spiritual forces within men. 
The world is to rise to a higher social stage not by banishing 
labor and by multiplying sensual enjoyments of the com- 
moner sort. Wealth, even in an economic view, is not the 
end of life, but merely the means to its realization. 

4. Enjoyment is increased hy a proper variety and har- 
mony of goods. As the old kinds of goods increase in 
amount and fall in value, there must be a substitution of 
new goods. An element added to the dress or to the diet 
heightens greatly the total gratification. The result is a unit. 
Think of a dinner without butter, or a cranberry-pie without 
sugar, or a dress-suit without a linen collar. Certain 
combinations are essential to the requirements of developed 
taste and present a problem of complementary goods. Com- 
binations of complementary goods enhance the enjoyment ; 
inharmonious combinations decrease it. That certain things 
"go together" is a fact that rests often in the nature of 
things. Complementary colors please the eye ; well-seasoned 
dishes please the palate. 

Again, the harmony of goods is affected by the special 
nature of the occupation. A farmer with his out-of-door 



§111] EFFECTS ON ABIDING WELFARE 401 

life can use tobacco with far less danger than the sedentary 
worker. A piano player cannot be a base-ball player: the 
one requires soft and supple hands, the other hard and 
callous ones. The young man must give up the piano or 
the game, or play both badly. The harmony may rest on 
a still more complex social adjustment. The loss to the man 
whose life is in the main on a higher plane is greater if 
he descends occasionally to a lower. A ditch-digger, looking 
at the question short-sightedly, may deem "a good drunk" 
a very desirable form of enjoyment. But a brain-worker, 
whose joy as well as efficiency depends on the clearness of 
his intellectual processes, must see that in his ease the perils 
and the costs are much greater. 

Wise consumption depends not alone on physical pleasures, unity of 
but on the spiritual unity of the uses made of goods. Hap- ^3°^*^^ 
piness and character are akin in the qualities of simplicity and in 
and unity. Happiness, so far as it depends on wealth, is a c^i^racter 
harmony of gratifications. Character is a harmony of ac- 
tions, a group of complementary deeds. There can be no 
harmony, without a central, simple, guiding principle. The 
wise and moral use of goods and the economic use of them 
are therefore for the individual essentially the same. Life 
is a unity. The results of the choice of goods are reflected in 
the health, intelligence, happiness, morality, and progress of 
society. It is vain for the economist to ignore the ultimate 
relations between economic choice and morality; it is folly 
for the moralist to ignore the economic bases of right and 
wrong in human conduct. 



26 



CHAPTER 42 
DISTRIBUTION OF THE SOCIAL INCOME 



Definition 
of personal 
distribution 
reviewed 



Personal 
affection 
and distri- 
bution 



§ I. THE NATURE OP PERSONAL DISTRIBUTION 

1. Personal distribution, in economics, is the reasoned ex- 
planation of the ways in which income is divided among the 
members of the community. Before noting more exactly the 
ways in which distribution can and does take place, it may 
be well to review briefly some definitions that have been 
given in other connections. Distribution is bound up in 
practice with production, but it can be thought of as a 
more or less distinct problem. Functional distribution is the 
attribution of value to agents or classes of producers, to land, 
machinery, and labor considered impersonally as groups of 
productive agents. Personal distribution is the actual ap- 
portioning of income to living persons. This theme now to 
be dealt with is the more important practically, for the ab- 
stract discussion of rent and interest is of use only as it 
helps to an understanding of this vital human problem. It 
is well to recall also the distinction between wealth income, 
money income, and psychic income. The first is the objective 
aspect, the last is the subjective aspect, of income; the 
second, money income, may be an expression, in money form, 
of either of the others, but commonly of the former. The 
money expression of psychic income can be only approx- 
imately attained. 

2. The individual's income is determined by a number of 
forces, only part of which are primarily economic. Many 
persons derive income directly neither from property nor 

402 



J I] THE NATURE OF PERSONAL DISTRIBUTION 403 

from labor. They neither toil nor clip coupons, but they flour- 
ish in the favor of others— parent, husband, wife, friends, 
patrons. So long as the good-will continues these persons 
may be as well off as if they drew a salary or owned a 
bank. If a person in control of goods shares them with an- 
other, it is a matter that economists must recognize, but 
cannot Avell reduce to rules of value. It is not the task of 
economists to explain why the impulses of generosity arise, 
but only how they affect distribution. The economic prob- 
lem of distribution really ends where owner or worker 
secures his income. Giving a part of it to some one else 
is essentially a form of consumption, and only secondarily 
a mode of distribution; it is the way chosen to spend the 
wealth income. 

The psychic income of individuals, therefore, is often made complex 
up of many elements. Some parts are due to services per- ^^^^^°* 
formed by the person himself. When one combs his own hair iacomes 
he is adding to his income. Benjamin Franklin said it was 
better to teach a boy to shave himself than to give him a thou- 
sand dollars. Other goods are the uses and fruits of legally 
controlled wealth: chance finds, as gifts of value or lost 
and abandoned goods; goods assigned to one by authority; 
wealth inherited; illegal gains by robbery; goods secured 
on credit ; gifts either of things or of services. The uses of 
this university are a gift forming a part, first, of the student's 
income, and, finally, of the social income. Such gifts can 
be traced back to large-hearted, public-spirited men like Ezra 
Cornell, but they must be looked upon as coming from some 
one. This list, incomplete as it is, suggests that the real 
income of most individuals has manifold sources. Let us 
undertake to examine and analyze the various methods in 
actual use in the distribution of income to the persons mak- 
ing up society. 



404 



DISTRIBUTION OF THE SOCIAL INCOME 



[CH. 42 



II. 



METHODS OF PERSONAL DISTRIBUTION 



Compulsory 
distribu- 
tion; vio- 
lence 



Chattel 
slavery 



War 
indemnities 



1. Distribution is sometimes compulsory, by force or 
fraud. This crude and primitive mode of distribution, the 
negation of personal liberty, never has been quite eliminated. 
In every country an unhappily large number of men from 
time to time break over into crime, from violence and high- 
way robbery down to sneak-thieving, pocket-picking, and 
bunco games. Not more than ten per cent, of this criminal 
element is at any one time in prison. This method of 
personal distribution, not hinted at in most theories of dis- 
tribution, determines a large part of the income of tens of 
thousands of men in this country and concerns the distribu- 
tion of millions of dollars. These enemies of society appro- 
priate whatever they can, and the law stops them if it is 
able. 

Slavery is distribution by legalized force, but the force is 
not legalized by the consent of the victims. The evolution 
of the harsher slavery may be traced through various forms 
of milder serfdom. There is found an element of this in 
the freest existing societies; men unwilling are forced to do 
things. A patent example is the convict on a chain-gang, a 
slave to society as a penalty for his violation of its com- 
mands. But some radical reformers to-day claim that pres- 
ent society is wholly based on legalized force, and that the 
working-man is essentially a slave. Their ideal cannot be 
realized without dissolving social bonds and destroying civi- 
lization ; yet the presence, even in our society, of this forced, 
unwilling submission on the part of some of its members can- 
not be ignored. 

A similar example of forcible taking is seen in case of war. 
Savage tribes plunder and take captive their weaker neigh- 
bors. Conquering modern nations usually exact tribute from 
defeated enemies. Germany got a billion dollars from 
France, Japan a quarter of a billion from China. The 



§11] METHODS OF PERSONAL DISTRIBUTION 405 

terms of peace at the close of our great Civil War were the 
most liberal ever granted by conqueror to vanquished; and 
yet the federal pensions granted to Northern soldiers are a 
form of tribute, being paid by taxes falling alike upon the 
North and the South. In all these cases the distribution by 
force is unwillingly suffered. In none of them is it redu- 
cible to economic rules or capable of a strict economic ex- 
planation. 

2. Distrihution may he chai'itable, that is, determined J)y charitable -u 
considerations of benevolence and affection. Charitable is ^4^^"^°° 
here used in its original sense, as synonymous with love or family 
affection. First to be mentioned is the love of parents, the 
root and type of all the forms of charity. The lack of eco- 
nomic equivalence in the relation of parent and child is 
complete in early years. The helpless infant gives nothing 
economic to the parent, the parent gives all to the child. 
Gradually, however, the balance is regained; as the years 
go on, not only does the child repay in aft'ection but in 
many cases he repays in material ways. In the factory 
districts and on the farm the child in early years begins to 
reestablish the balance, becomes a worker, and contributes as 
much as the cost of his support, and finally more. A student 
of modern English town life has traced the curve of poverty 
traversed by the average child of the poor, as the family 
moves, now below, again above, the level of minimum income 
required for physical efficiency. In the middle or proper- 
tied classes the children do not for many years take the 
burden from the parents, and it is doubtful whether in most 
cases the economic balance is ever reestablished. It is not 
to the parents, but to the succeeding generation, that the 
debt is vicariously paid. 

Friendship widens the range of generosity and multiplies Andin 
the mass of gifts. Broad sentiments of humanity lead to ^J^^ 
gifts outside the range of personal affection and personal 
interest, to the beggar on the street, to institutions devoted 
to charity. In New York state about twenty million dollars 



406 DISTEIBUTION OF THE SOCIAL INCOME [CH. 42 

a year is given to charity, and in the country at large many 
times as much. In the year 1901 over one hundred million 
dollars was given to education in the United States by pri- 
vate donors; and that high mark will no doubt soon be 
passed. Gifts in cases of great disasters, as the Irish and 
Indian famines, the Chicago fire, the Galveston flood, the 
eruption of Mount Pelee, bespeak a widening generosity. 
Religion impels to the building of churches, to the support 
of priests, missions, and manifold religious undertakings. 
Charity in this connection is the expression of a sentiment 
that varies from the broadest and most general humanitarian 
sentiment to the most intense and ardent personal affection. 
I Authorita- 3. Distribution may he by an authority willingly ac- 
butionln"' ^"^^owUdged. The two preceding forms of distribution, force 
the despotic and love, shade off into this form. In them the ones from 
^^*® whom goods are taken or to whom they are given have no 

power to change the conditions ; here is to be considered the 
case where the person bows willingly to the superior power 
and takes what that power accords him. There are few des- 
potisms in which the government is not based on the wishes 
and average capacities of the governed. If the citizens 
as a body really desired and were deserving of better gov- 
ernment, in most cases they could get it. Much is heard, for 
example, of despotism in Russia, and of the abject condition 
of the people; but travelers testify that while many in the 
educated student classes are filled with the greatest discon- 
tent, and the intelligent subject peoples, such as the Finns, 
detest their rulers, such sentiments are far from general 
throughout the empire. The power of the Czar could not 
exist for a single moment if the mass of the people did not 
look to him as the great father whom they venerate and 
love. If this is true, the despotism in Russia, though abhor- 
rent to our ideals of freedom, is fitted to the aspirations of 
the mass of the people. So far as government determines 
income, the authority distributing income there, as else- 
where, is one willingly acknowledged. 



sWij METHODS OF PERSONAL DISTRIBUTION 407 

In patriarchal tribes, in communal societies, in monastic incom- 
and other reliirious orders distribution is by an accepted ""'''ties 

^, . „ , , , , . and families 

authority. ±iach person works at what he is commanded to 
do, and some one in authoritj^ (the patriarch, head of the 
community, the father of the monastic order) portions out 
the work and the reward. In the family this rule largely 
prevails, and even after the children have come to years of 
discretion they not infrequently accept, from habit or af- 
fection, the will of the parents, and give up their entire 
wages to receive back a portion. The method of charitable 
distribution while the child is young gradually changes to 
authoritative distribution after the child becomes a worker. 
The untrained and indocile youth, however, is made the sub- 
ject of compulsory distribution. 

The collection and distribution of taxes is by public au- in much 
thority. No attempt is made to give back an exact equivalent 8"^^™- 
to the tax-payer. The money is taken and spent by authority action 
for the public good. This method is exemplified in the work 
of certain commissions appointed by law to fix rates or settle 
disputes, as boards of conciliation and arbitration and rail- 
way commissions. The courts sometimes find themselves 
obliged to enter this field, although they do so most un- 
willingly. They try to confine their efforts to interpreting 
the contracts men have voluntarily entered into, and they 
avoid, so far as possible, the making of contracts or the fixing 
of rates. 

In many cases, little thought of as economic distribution, in various 
the authoritative method is followed. Literary and ora- contests 
torical contests are passed upon by a set of judges whose 
opinion of merit determines the award. It is a poor method, 
often resulting in injustice (as every defeated candidate will 
admit) ; but it is the only way practicable for deciding such 
contests. Yet there are literary and oratorical contests de- 
cided very differently. If a man advertises himself as an 
orator and charges fifty cents admission to his lecture, every- 
one who goes to hear the man votes that h(^ is an orator; 



408 DISTRIBUTION OF THE SOCIAL INCOME [CH.42 

everyone having money but staying away votes that he is 
not of such value. The one is judgment by the authorita- 
tive, the other by the competitive, method. The essence of 
the method of distributing by authority is that one individ- 
ual (or group of individuals) judges of the deserts or duties 
of others, decides what others must get or must pay, not what 
he himself is willing to pay. Authoritative distribution 
is necessary in many cases, but it is fraught with dangers. 
It is the essence of socialism that it would make this plan uni- 
versal. 

4. Distribution of psychic income may he in part hy the 

collective use of social wealth. By collective use in the full 

sense is meant the continuing enjoyment at the same time 

by all caring to partake and without limit as to amount. 

*^ -Distribution Now it is evident that, because of difficulties that arise, not 

by collective ^jj things are capable of this kind of enioyment. Free 

enjoyment „ . „ . 

water for private use from public waterworks is wasted ; 
free meals and clothing to school-children are open to still 
greater abuses. Men cannot thus collectively enjoy rare 
wines or good confectionery ; they cannot partake without 
limit of a limited supply. But libraries and schools may 
practically be managed in this way. They require both 
certain qualifications and certain sacrifices on the part of 
the user. Collective enjoyment is most completely possible 
where the use of a permanent form of wealth, such as a park, 
can be made free to the public. All individuals may en- 
joy equal privileges, though general rules may limit the 
kind of use ; for example : no one may be permitted to pull 
flowers or to walk on the grass, but all who make use of the 
park enjoy equal privileges. Henry van Dyke in one of his 
essays puts into the mouth of his boy the question, "Father, 
who owns the mountains?" and the answer is. He who can 
enjoy them. Every man without covetousness, as he stands 
on this hilltop, owns the mountains, the lake, and this beau- 
tiful valley. 

In some ways the amount of public enjoyment is de- 



§11] 



METHODS OF PERSONAL DISTRIBUTION 



409 



Distribution 
by custom 
and status 



creasing, as by the growing density of population, by the loss 
of open spaces and commons for playgrounds, by the de- 
struction or fencing in of natural scenery ; but in other ways 
it is growing and must grow rapidly. The spirit of civic im- 
provement spreads. The streets are better paved than for- 
merly; there are more public buildings, art galleries, and 
noble monuments. Every cross-road in the land will some 
day have its fountain and its statue. The cooperation of the 
whole community gives to collective use many of the advan- 
tages of large production, and the maximum of enjoyment. 

5, Distribution may be by status or set rules and cus- 
toms. Distribution by status fixes the shares of men inde- 
pendently of their effort and without their control. It is 
guided neither by their personal merit nor by the economic 
value of their services, but by the merits and acts of men 
not living. This method has prevailed and still prevails to a 
great extent, though in our society this is hardly realized. 
Feudal society was built on status. Men were born to cer- 
tain privileges and positions ; they inherited property which 
could neither be bought nor sold ; they followed trades which 
could rarely be entered by any outside of favored families. 
Caste in India and in other Oriental countries regulates by 
status a large part of the life. In western countries to-day 
inheritance of property is the main legal form of status and 
it shades off into other forms of distribution. While in some 
cases inheritance may be looked upon as a gift to the heir, 
in other cases, elsewhere noted, it is partly earned by the heir 
who has helped to produce it. By public opinion and by 
prejudices, status is still maintained even where the law has 
formally abolished it, as is seen in modern race problems. 

6. Distribution is usually competitive in accordance with competitive 
the value of the product. This is the dominant form of ^^^^^^''^[1°° 
distribution in modern society. It is the essentially economic nantform 
form, as contrasted with the legal and personal forms just 
described, because it is impersonal and reducible to a 

rule of value. Distribution under competition is made not 



410 



DISTRIBUTION OF THE SOCIAL INCOME 



[CH. 42 



Various 
ideals of 
distribution 



with reference to abstract ethical principles or to personal 
affection, but to the value of the product so far as it is 
honestly controlled. Monopoly, it may be noted, never has 
ceased to rest under the ban of Anglo-Saxon law, hence to 
exemplify compulsory, as opposed to competitive, distribu- 
tion. A striking feature of the competitive method is its 
*-^ decentralization. Each helps to value the economic services 
of each. If one pays more for the services of the singer than 
for those of the cook, it is not because he would rather listen 
to the singing than to eat, but because by apportioning his 
income he can get the singing and the eating too. In the 
existing circumstances, the singer's services seem to him 
worth paying for, and he backs his opinion with his money. 
V, So each is measuring the services of all others, and all are 
valuing each. It is the democracy of valuation, while the 
method of authority is an oligarchy or monarchy. 

7. The best disfrihution in practice must he sought in 
union and harmony of these various methods. Various social 
reforms propose simply the extreme application of one kind 
to the exclusion of the others. There are two opposing views 
of competition : one, that it is the ideal to be sought ; the 
other, that it is inherently bad, and therefore should be abol- 
ished. Extreme individualists, believing that everything 
would be settled for the best by free competition, Avish to 
make it universal. They ignore the many cases where it does 
not, should not, and cannot exist. 

Socialists, ill content with the share secured by the less 
skilled laborer, say that the competitive plan is unsound at 
the core. They say that distribution should be not in pro- 
portion to value, but in proportion either to needs or to de- 
serts (they are not agreed which), judged by a vague ethical 
standard. But this involves the principle of authority in its 
extremest form. It intrusts to some men the function of 
passing upon the economic merits or desires of all others. 
Yet that alone is not a conclusive argument against all use 
of authoritative distribution. In many practical cases the 



J II] 



METHODS OF PERSONAL DISTRIBUTION 



411 



intrusting of power and authority to men to judge of the 
value of others cannot be avoided. Whatever is indispen- 
sable, whatever is the best possible, is, humanly speaking, 
just. Assessors, judges, jurors, must be employed. Inter- 
state commerce commissioners determine whether rates 
are reasonable, boards of arbitration settle disputes, tlie 
strike commission adjudicates difficulties in the coal regions. 
Doubtless these methods will be increasingly used. 

There is no other kind of distribution than those enume- Need of a 
rated. The strongest contrast is between the competitive ^^sebiend- 
and the authoritative principles ; the others are minor and methods 
modifying. None of them alone is sufficient; each has 
its merits and each has its defects; they must supplement 
each other. Actually they are employed in modern society 
side by side; each seems essential and best in some special 
application. But it does not follow that exactly the proper 
use is now made of each. No tw^o generations have followed 
the same rule, and the proportions in which use has been 
made of them has constantly shifted. It must be recognized 
that the principle of diminishing utility applies to each 
method of distribution as it does to the productive processes. 
Each may be best under certain conditions and circum- 
stances, but, extended in application, each reveals its weak- 
nesses. In any productive process the best method depends 
upon the proper proportion and combination of elements. 
Progress toward the best possible distribution is to be sought 
in the wise adjustment of the various methods to human 
nature and to human needs. 



CHAPTER 43 
SURVEY OF THE THEORY OF VALUE 

§ I. REVIEW OF THE PLAN FOLLOWED 

Thecycie 1. The heginning and end of economic study is man. Be- 

eranomic "^ ^^^^ leaving the more theoretical and abstracter part of the 

study theory of value, it may be well, at the cost of some repetition, 

to restate and review the relations of the various parts of 

the argument. Intent on details of the theory of value the 

student is in danger of losing its broader perspective. 

The proposition with which this section opens was accepted 
as our axiomatic starting-point. It was not so in the older 
political economy; men too often were looked upon rather 
as a means to an end, namely, the creation of wealth. This 
proposition refers to all classes, not to a small group of 
men. The aim of economic study is democratic, being the 
welfare of all men. Economics does not purpose, however, 
to explain man's action with reference to all things. It asks 
and attempts to answer the question: " Why does man at- 
tach value to certain things and actions ; why does he 
measure them in certain ratios as expressed in terms of each 
other; and why do these ratios change with changing condi- 
tions ? ' ' This purpose has determined the order of our study. 
Beginning with an analysis of the nature of wants, and of the 
mental process of valuing consumption goods, the circle of 
inquiry widened to the problem of valuing things whose 
relation to wants is more remote and indirect (though not less 
important). 

The problem of future uses, the major part of the theory 

412 



51] 



REVIEW OF THE PLAN FOLLOWED 



413 



of value, leads back to the question of the use man makes of 
things— a field claimed by the moralist, but one that cannot 
be neglected by the economist. Economics is not the whole 
science of social relations. It is a restricted part of the 
field. But it comes into relation with great practical ques- 
tions that touch all sides of life. Thus economics broadens 
and unites with the general stream of sociology. In the pur- 
suit of our study one comes back to the starting-point and 
cause of value— human wants and the use made of wealth to 
gratify them. The circle is completed. We have surveyed, 
rapidly and imperfectly it is true, the whole range of 
economic inquiry. 

2. The central point iji economic study is the simplest 
problem of exchange value. The first look at the economic 
world reveals so many things that have relation to wants, 
and relations so complex, that the mind is confused. The 
object of science is to simplify ; it seeks unity in the midst of 
chaos. Relations exist between wants and things that cer- 
tainly never can gratify them directly. Where is the simplest 
aspect of the problem to be found? Evidently in the ex- 
change of consumption goods, for these are in closest touch 
with wants. Out of the complex of direct and indirect goods, 
those few which are at the moment gratifying wants must be 
somewhat abstractly, but logically, set apart and studied. 
In the simplest problem, the exchange of the most typical 
consumption goods, is the key to the larger problem of value. 
If one could follow it step by step into its complexer rela- 
tions, he might hope to understand everything in economics. 

3. The problems of rent and of time-value are successive 
steps in the explanation of the exchange value of indirect 
agents. The term rent has been so variously defined that no 
caution to the student as to its use can be deemed superfluous. 
Until recently economists sought to confine the term to the 
income from natural resources (or land). Rent, in their 
conception, was the income from one group of goods, physi- 
cally distinguishable from another group of goods, called 



The unit in 

value 

problems 



Former or 
conven- 
tional con- 
ceptions of 
rent and 
interest 



time -value 
as here used 



414 SURVEY OF THE THEORY OF VALUE [CH. 43 

capital, which were supposed to yield interest. That is, rent 
and interest was each supposed to bear much the same rela- 
tion to a particular set of durable agents; the difference 
between them was primarily in the agent that yielded them 
(though there were other complicating thoughts) rather 
than in the aspect of value they represented. 
Rent and Rent as defined in this volume has the much broader 

meaning of the usufruct of any material agent as contrasted 
with the use-bearer. Usufruct is a conception most intimately 
related to that of consumption goods, but is logically one step 
further removed from want. Time-value, as here considered, 
is a broader conception than that of contract interest, for it 
has to do with the all-pervading element of time in its in- 
fluence on value. Some rents are logically, and in practical 
business as well, not measured over periods of time, but at the 
moment of their accrual. The measurement of time differ- 
ences is mainly required in setting a valuation upon a more 
or less permanent use-bearer. This process, which is capital- 
ization, has only recently been recognized to be the discount- 
ing of all the future uses to their present worth. While in its 
essence this is merely a problem in exchange value, it is the 
highest, subtlest, and most difficult of such problems. Its 
understanding presupposes rent, just as rent presupposes the 
analysis of wants and marginal utility. It is the outer zone 
of the value problem, carrying the thought of value years 
away (all but an eternity away) from present enjoyment. 
Different AVhile both rent and time value are widened so that each 

v^r^'° applies in some manner to all durable agents, it is a grave er- 
ror to conclude hastily that the intention is to make synony- 
mous the old terms rent and interest. Rent and time-discount 
remain essentially different stages in the value problem, Ac- 
tual concrete net economic incomes as they arise are always 
rents. Interest never accrues in a concrete form except under 
the interest contract for a money loan (a contract income, 
not an economic income), and this evidently is a species of 
contract rent. Time-value is a phase of value connected 



ill] VALUE THEORIES AND SOCIAL REFORMS 415 

logically with investment, or the calculation of future earn- 
ing power; rents are both actual and expectative, or future, 
but as realized incomes they always express present earning 
power. Together, rent and capitalization embrace the whole 
problem of valuing durable material agents. 

4. Wages and profits are of the same genus, the value of wages and 
human services of different grades. The attempt has been f^^^ 
made in the foregoing treatment to show the unity between 
the problems of wages and profits, and to point out the 
difference between the conditions that surround them. 
Through the common characteristic, social utility, the em- 
ployer's service can be compared with the most ordinary or 
the most artistic labor. Profits and wages, therefore, are sim- 
ply different aspects of the same question. A common power, 
or principle, is found in all objects of value, a power to 
gratify human wants. In the variety of human services 
and in material goods must be sought this unity. 

The different kinds of services range from direct to most 
indirect goods. The commonest labor may serve welfare at 
the moment or may be embodied in a form to be used years 
later. In that light, wages seems a more complex problem 
than either rent or capitalization. But the moment the ser- 
vice embodies itself in a material good with future uses the 
general theory of capitalization applies to it. 

§ II. RELATION OF VALUE THEORIES TO SOCIAL REFORMS 

1, The earlier theories of political economy implied a dis- "Ortho- 
mal view of the future of the masses. The theory of value one J^J'.^.'^j 
holds is sure to affect his view of economic progress and of economy 
social reform. The theories from the middle of the eighteenth 
to the middle of the nineteenth centuries, however varied 
they were in other respects, nearly all gave a gloomy view of 
the condition of the laboring-men. The physiocratic school 
in France, the so-called " orthodox " economists in England 
(that is, the writers from about 1800 to 1850 that were in 



socialistic 
theory 



416 SURVEY OF THE THEORY OF VALUE [CH. « 

sympathy with the landholding or commercial classes), and 
the socialistic or laboring-class theorists, all inclined to this 
view. It was while this view prevailed that Carlyle char- 
acterized political economy by the term still sometimes heard 
—"the dismal science." The thinkers of that time started 
their study of value at wages, and assumed that population 
would always increase so fast as to force labor to a bare 
subsistence. The other shares (or the other classes of soci- 
ety) were supposed then to absorb all the surplus income. 
Economics to-day is not especially lugubrious, and its more 
cheerful note is due as well to its changed theory of value as 
to the evidence of advancing welfare among the masses. 
The gloomy 2. The Socialistic theory of value, akin to the other, holds 
that capitalists absorb all the benefits of progress. The so- 
cialists (of the radical school) claim that their theory is 
merely the logical conclusion to be drawn from the old "or- 
thodox" theory, stated in its extremest form. Usually, 
however, the orthodox theorists softened and modified greatly 
the statement of their harsher views. The socialis ts have 
not been willing to recognize any ameliorating conditions. 
They say :_e^oiioniic_-tlieacy..,sho^s-JJiaLunder a competitive 
condition of society the laboring-man must be forever ground 
down in helpless misery; therefore the only hope of the labor- 
ing masses is to do away with competitive society and to 
substitute for it cent;£al^_goyernmental control of all industry. 
They did not and do not attempt to distinguish carefully the 
part of production, due to brains and effort, from the part 
due to ownership of capital. The socialist theory is a plan 
for political agitation rather than a scientific theory of 
value. It was originated or elaborated by men such as 
Karl Marx, Frederick Engels, and Ferdinand Lassalle, as 
labor leaders and political agitators, who found a ready 
weapon in the bungling economic analysis of the time. The 
claim of a scientific basis for socialism has continued to be 
proudly made by their followers, but it has a tottering sup- 
port in their defective theory of value. 



UI] 



VALUE THEORIES AND SOCIAL REFORMS 



417 



This is the f^lt""" 

theory 



3. The single-tax theory of value is that ground-rent George's 
automatically absorbs all benefits of progress 
most notable example of a plan of social reform growing out 
of an abstract theory of value. While the socialists first had 

their plan of social reform (or revolution), in whose support 
Marx's fanciful theory of value was invented, Henry George 
appears first to have got hold of a theory of value that 
suggested his plan of social reform. Studying the political 
economy of Ricardo and Mill, he accepted their ideas regard- 
ing the hopeless outlook of the laboring classes, and their 
conception of the theory of ground-rent with its false im- 
plication that land-owners get all the surplus in society. 
George thus came to believe that, with private ownership in 
land, comp£tiliiu_sJt£adjj^;_£obbed_al^ landlords, even the 
non-landholding capitalist, of any share~in the benefits of 
progress. This theory of value is thought to explain all the 
poverty in the world. It calls, in the single-ta xer's opinion, 
for a radi cal measure of reform^_jia niely,j L]ia„ta^ing of all 
rent of land forpuT5Tic purposes as a common instead of an 
individual income. If the theory of value on which it is 
based were sound, the doctrine would have irresistible reasons 
in its favor; if it is false, most of the argument falls to the 
ground, though there may still be substantial reasons of a 
different nature for the exceptional treatment of ground- 
rents for purposes of taxation. 

4. Recent theories of value assign to labor a more hopeful Recent 
position. A most optimistic theory of wages is "the residual 
claimant theory," presented by Francis A. Walker. His 
view was that the various shares of production, such as land- 
rent, the income from machinery, etc., and the enterpriser's 
profits, were fixed by forces independent of wages, and any 
increa.se in the product must therefore fall to the laborer as 
the residual claimant. This ccmclusion has the one merit 
of explaining somehow the rise in wages in the past century, 
but the fallacy of its method is too evident to call for ex- 
posure. Not to enter into the details of the method, it is 

27 



hopeful 
theories of 
wages; 
Walker's 



418 



SURVEY OP THE THEORY OF VALUE 



[CH. 43 



Clark's 
wage theory 



enough to note that it involves the circular reasoning that 
land-rent is a surplus over cost of production, and is fixed 
regardless of wages, whereas the cost of production itself is 
made up of money wages. 

Another American economist, John B. Clark, is led by his 
theory of profits to a most hopeful conclusion as to the future 
of wages. Profits he considers to be essentially the reward 
for. improvements in productive processes, which gradually 
accrue to the general benefit. As profits thus disappear, the 
average wage-earner is correspondingly uplifted, a conclu- 
sion quite as hopeful as that of Walker. In discussing profits 
above, dissent from the narrow conception of their source has 
been expressed. 

Some facts lend support to every one of these theories of 
social progress, but other facts refuse to be harmonized. The 
temptation to get a simple, dogmatic explanation of value 
should be resisted. When the interrelation of the factors is 
recognized there is little likelihood of concluding that some 
one of them v/ill absorb all the benefits of progress. One is 
not driven to the extreme either of optimism or of pessimism. 
While the theory of value is not in itself a theory of society, 
it greatly influences social conclusions. Clear economic anal- 
ysis is a condition to sound thinking on practical questions. 



§ III. INTERRELATION OF ECONOMIC AGENTS 

Organic 1. The industrial process is a unity and the different 

nature of aqents hear an organic relation to each other. The problem 

theproduc- ^ ^ .... . , 

tive process of value is not one of physical division ; it is one of logical 
analysis, and this is not possible in isolation or without the 
competition of men. Production as now carried on is a social 
process ; the determination of market price is a social process. 
The different agents are complementary goods, each neces- 
sary to the best use of the various other agents. The value 
of seed is not to be found apart from the use of the ground ; 
or the value of the leather apart from the shoemaker or the 



5 III] INTERRELATION OF ECONOMIC AGENTS 419 

thread he uses. When these things are brought together in 
society their value is found by the comparison and measure- 
ment of marginal utilities. Economic forces, like other classes 
of forces, act and react upon each other. Two bodies attract 
each other in space ; two chemicals uniting are both trans- 
formed into a substance differing from either. The economic 
result of materials and men cooperating is something differ- 
ing from either factor, yet dependent on both. 

2. TJie divisions of the older political economy are aspects Thecon- 
of the general problem of value. The divisions conventional '^'entionai 

. divisions 01 

in the text-books on political economy, namely, production, economics 
exchange, distribution, and consumption," have not been ob- 
served in the plan of this work. It has not seemed possible 
to accept the view that each of these phases of the vital 
economic process could be discussed completely apart from 
the others. Consumption must be studied at the beginning, 
as the basis of exchange value, and again at the end, when the 
circle of thought has returned to the use man makes of 
wealth ; and it pervades the whole subject of value, for back 
of every price is the potential utility of the good. Exchange 
is coextensive with the whole process of associated industry; 
for wherever there i? a price, there is exchange. Subjective 
value outside a market forms a small, though not negligible, 
part of the problem for the student of to-day. Production 
is implied in every exchange, as exchange is in all social pro- 
duction. They are, indeed, but different phases of the larger 
phenomenon, the economic process. Nor is distribution, con- 
sidered in its impersonal or economic form, any other than 
the logical valuing of the shares of the factors in economic 
production. Impersonal distribution is coextensive with eco- 
nomic production. Whatever a good, logically considered, 
contributes to value in production, that is its share of the 
product. Personal distribution, it is true, brings in other 
great influences which have been partly considered, but which 
will be treated more fully in the division to follow, on the 
influence of the state in the distribution of income. 



420 SURVEY OF THE THEORY OF VALUE [CH. 43 

The broad- 3. The latv of diminishing returns is the broadest prin- 
ofvahiT'^^ cipZe of value. The one character common to all goods is 
that their importance varies with their quantity in any given 
connection. This is true of direct goods whose power to 
gratify wants falls as the supply grows ; it is true of indirect 
goods, whose technical importance diminishes as the quantity 
increases, and which when taken at any given cost can be 
applied, after a point, only with diminishing advantage. The 
gradual extension of the marginal principle from land used 
in agriculture to every conceivable economic agent is the 
most important development of the last century of economic 
theory. 
Geaeraiity It being true that things are measured by the utility of the 
value ^^° ^^^^^ ^^^^^ '^^^' logically considered, the least change in the 
combination alters the value of all the factors. Practical 
economic problems, therefore, are dynamic, not static. The 
view that the shares of the different factors are fixed by 
quite separate laws has not been accepted here. The law of 
rent is the same as the law of wages in its essential point 
and principle. It is a general law of value applied to a par- 
ticular kind of want-gratifier. The law of substitution like- 
wise is a general law, for within limits some substitution of 
factors is always possible along the margin. That being 
true, every movement of price creates its own resistance; sub- 
stitutes will be found for materials, demand will decline, and 
a new equilibrium of price will be attained. 
Mutual 4. The factors and agents of production mutually fur- 

^^thJ^^^^ 7m's/i the field of employment for each other. Each factor 
factors is dependent for its technical efficiency on the presence of the 

other factors. If labor is plentiful and machines are scarce, 
machines bear a high rent. In accordance with the law of 
diminishing returns, the last unit of labor in that case con- 
tributes little to the product, and labor gets low wages, while 
more is attributed to the machine. Each machine thus may 
be considered to offer a field for the employment of labor. 
If population increases and land remains fixed, the need for 



UII] INTERRELATION OF ECONOMIC AGENTS 421 

food raises the rental value of land. But if population in- 
creases slowly, and capital and science progress, the field for 
the employment of labor is enlarged; and if new lands are An ever 
opened up or new resources are discovered beneath the sur- probi«^^ 
face of the land, the field for labor is still more enlarged 
and a greater share is attributed to labor. This changing 
character of the problem must be recognized; no share is 
foreordained in size. 

The pursuit of the analysis of value along the lines of 
marginal utility thus leads to conclusions far less mechanical, 
and, to the superficial student, less simple than were the 
the doctrines prevailing in the older economics. But the 
conclusions are, let us hope, more exact and more applicable 
to the real world, enabling the student to arrive at juster 
views of the present interests and of the future welfare of 
society. 



DIVISION B-RELATION OF THE STATE 
TO INDUSTRY 

CHAPTER 44 
FREE COMPETITION AND STATE ACTION 



Definition 
of economic 
freedom 



§ I. COMPETITION AND CUSTOM 

1. Economic freedom exists when men's goods or their 
own services may he exchanged as they choose, without hin- 
drance. Competition is but another expression for economic 
freedom. Where men are free to exchange their goods and 
to get the best price they can, and actually do so, they are 
said to compete. The action of men in the mass follows 
pretty regular lines, corresponding to certain abiding mo- 
tives. If one man dictated all industry, a very fragmentary 
science of economics would be possible ; but the mass of men 
act according to some rule and are free so to act. When men 
are free to bring their goods to a market and get the best 
price possible, a single market price results. 

When cost of production was believed to be the regulator 
of value, it was said that the law of value laid down was 
true "within the limit of free competition." Market price 
varied ceaselessly from cost of production, and whenever it 
did "the law of value" as then formulated was admittedly 
invalid or inapplicable. The law of monopoly price was sup- 
posed to be in marked contrast to the law of competitive 
prices. The law of prices, as followed in our study, stated in 

422 



§1] COMPETITION AND CUSTOM 423 

terms of marginal utility, is equally valid in competitive 
and in monopolistic conditions if there is merely one-sided, 
or buyers', competition. Two-sided competition is not the 
sole, though it is the usual condition, which the economist 
takes account of in reasoning on the problem of price. Any- 
thing that keeps men from exchanging what they have for 
the best price, interferes with competition. Some of these 
hindrances have been noted, others are now to be. 

2. Economic freedom does not mean equality of power or Economic 
of efficiency. It was said in discussing monopoly that it l^^^^^H 
was not to be understood to be merely either scarcity or su- efficiency 
periority. To speak of the class of laborers of ability above 
that of the average day laborer as having a monopoly is 
certainly a confusion of monopoly with the scarcity of effi- 
ciency. The term competition is not easy to define in prac- 
tice; for it is not easy to see just what part of a man's 
inability to exchange is due to his own lack of efficiency, and 
what to things outside of himself which prevent him from 
exchanging his labor. But the thought is clear that free 
competition— economic freedom — is limited whenever men 
are hindered by any power outside themselves from using 
their economic power as they prefer. The limitations of com- 
petition, thus understood, are essentially social limitations, 
imposed by other men either unconsciously by custom, con- 
vention, tradition, or consciously by force or by laws. When, 
among Polynesian tribes, the custom of taboo prevailed, by 
which certain things were reserved to the rulers and were 
forbidden to the common man, there was a limitation on his 
economic freedom. Contrast such limits with those set by 
the penury of nature. The savage may like best to hunt, but 
if there is no game, he must fish; he may like best to make 
arrowheads, but in need of food he must dig roots. Eco- 
nomic action is limited by lack of knowledge and skill; the 
resources of nature lie unused under the feet of savages 
who are suffering from their lack. These are limitations 
not of economic freedom but of economic efficiency. 



424 



FREE COMPETITION AND STATE ACTION 



[CH. 44 



Limitation 
by custom 
in early 
society 



Limitation 
by custom 
in the Mid- 
dle Ages 



3. In early society custom limits economic freedom in 
many ways. The savage is not a man without law ; he is 
bound in many ways to prescribed lines of conduct. Primi- 
tive custom usually takes on a religious sanction, and every 
member of the tribe is compelled to do as his fathers have 
done and as his neighbors are doing. He is not free to 
choose. Custom in some ways is favorable to the welfare 
of society, for it limits the power of masters and rulers, 
preserves the rights of individuals to common property, 
and is in the interest of the weak as well as of the strong. In 
an age of force if it were not for custom, he who had might 
on his side could take all. So in early society even economic 
relations were complex and yet almost fixed— changing only 
slowly from generation to generation. Every such social 
custom that limits the choice of men limits economic freedom. 

4. Custom ruled a large share of the industrial life of the 
Middle Ages. Political and economic interests were not 
clearly divided in the Middle Ages. Land was the all-impor- 
tant kind of wealth. Military and other public services were 
performed by the vassal, who thus at the same time paid 
his taxes and the rent of the land. The landlord was at once 
the ruler, the receiver of rents, and the collector of taxes. 
The rent, however, was not a competitive price, but consisted 
of the dues and services the forefathers had been accustomed 
to pay. This limited slavery, like all other slavery, was 
wasteful, as it did not give to the individual the strongest 
motive to increase the quantity and to improve the quality 
of his service. Trade became limited in almost every direc- 
tion. Crafts and gilds arrogated to themselves the right of 
employment in their industries. No matter what talent the 
son of a peasant might show, he usually found it impossible 
and always found it difficult to follow the occupation of his 
choice. Privilege pervaded all the life of that time. In 
such conditions economic friction is great. Men are kept 
in trades below their ability, while others gain command of 
monopolistic and unearned returns. 



§11] ECONOMIC HARMONY THROUGH COMPETITION 425 

Yet through all the INIiddle Ages ran the forces of compe- 
tition. The inefficiency of customary services was a constant 
invitation to competitors. Men were striving to break over 
the barriers of custom and prejudice. The strife for freedom 
was the vital economic force even of the Middle Ages. The 
industrial history of that time is largely the story of the 
struggle of the forces of competition against the bounds of 
custom. 

§ II. ECONOMIC HARMONY THROUGH COMPETITION 

1. The industrial events following the discovery of Effect of 
America strengthened the forces makinq for economic free- ™°^^™ 

^ ' Y forces on 

dom. Discoveries in the Western hemisphere opened up a custom 

wide field for the adventure and enterprise of Europe. Com- 
merce is the strongest enemy of custom, and new opportuni- 
ties gave a rude shock to the conservatism both of the manor 
and of the village. With the rapid growth of industry 
and manufactures, old methods broke down. In an open 
market custom declines ; it flourishes best in sheltered places. 
Further, the movement of thought in the Reformation and 
the spirit of the time, expressing the principle of personal 
liberty, allowing the individual to follow his own opinions 
and take the consequences, were favorable to competition. 
Despite these facts the restraints of the national governments 
on trade continued great, in some respects increasing during 
the seventeenth and eighteenth centuries, in France, Holland, 
and England. The regulation before attempted by towns 
and villages was employed on a larger scale by national 
governments with their commercial systems. The colonies in 
America were used for the economic ends of the "mother 
countries" and for the selfish interests of the home mer- 
chants in Europe. The American Revolution was one of the 
bitter fruits of the English policy of trade restriction. 

2. Adam Smith's work advocating greater economic free- Adam 
dom had a profound influence upon public thought. "The mfluence 



426 



FREE Ct)MPETITION AND STATE ACTION 



[OH. 44 



The philoso- 
phy of 
natural law 



The doctrine 
of the eco- 
nomic 
harmonies 



"Wealth of Nations," the first great work on political econ- 
omy, was published in the year 1776. That was the " psy- 
chological moment," as public thought was so prepared for 
it that it had its maximum possible influence. The year of 
the American Declaration of Independence gave the most 
striking object lesson on the evils of a selfish colonial policy 
that interfered on a grand scale with economic freedom. 
The old customs had become ill fitted to life, ill adapted to 
the rapid industrial changes that were going on. What was 
needed in many directions, both in politics and in industry, 
was negative action by the government, the repeal of the old 
laws, the overthrow of old abuses. The French Revolution, 
following a few years later, emphasized this thought in the 
political field. The philosophers of the time believed in a 
"natural law" in industry and politics. The reformers of 
the time wished to throw off the trammels of the past and to 
give men opportunity to exert themselves "naturally." In 
America the old abuses never had taken deep root, as the 
conditions of a new continent were not favorable to monopoly 
and privilege. Although the movement for the repeal of 
medieval laws has continued in Europe from 1776 till the 
present time, yet to-day custom is stronger in Europe than 
in America. Serfdom Avas not abolished until the nineteenth 
century in Austria and southeastern Europe, and not until 
a few years ago in Russia. Many economic and cultural 
forces furthered this movement, but the most powerful intel- 
lectual force in its favor was the work of Adam Smith. So 
strong an impression did Smith's book make, that in the 
minds of men "free trade" became almost identical in 
thought with political economy, whereas that was but the 
temporary eccnomic problem of the eighteenth century. 

3. The doctrine of the "economic harmonies'' is the ex- 
ircmest form of belief in the virtues of competition. Every 
truth in political philosophy finds some exaggerated expres- 
sion. The main task of the student is to determine what 
shade of gray things are, rather than whether they are white 



5 II] ECONOMIC HARMONY THROUGH COMPETITION 427 

or black. The belief in the benefits of competition and the 
virtues of economic freedom found expression in the doc- 
trine of "the economic harmonies." This is the faith that 
if men are left entirely free to do as their interest dictates, 
the highest and best efficiency for all will follow; it is the 
belief that the economic interests of all men are in harmony. 
The most striking evidence in support of this thought is the 
stimulating effect of self-interest freely working in the field 
of competition. Each strives to do what will bring him the 
largest return, and the price others pay measures their esti- 
mate of the service. Each seeking his own interest is led to 
make himself more useful to others. Thus are men stimu- 
lated to sacrifice, to invention, to preparation ; thus is zeal 
animated and are efforts sustained. 

Through self-interest the working force is distributed over Good social 

the field of industry wherever it is most needed. The remark- ^^^f^^°^ 

•' self-mterest 

able adjustment of industry to the needs of each neighbor- 
hood is brought about by individual motives, not by 
centralized authority. It is not mere chance that produces 
this harmony. Wherever consumers settle, stores are started 
and factories are built. Wherever work is to be done, men 
come in about the right number to do it. Skill is adjusted 
to needs by the delicate measurement of the market rate of 
wages. Competition gives a definite rule of price — certainly 
the only definite impersonal rule; some say the only just 
rule. The competitive price must be appealed to even in 
arbitration. It is the standard to which things tend con- 
stantly to adjust themselves in an open market. 

4. Experience shows that the economic interests of men conflicting 
are only partly, not wholly, in harmony. That there is a [Jg^^neL 
great measure of truth in the statements just made, all must world 
admit; but their application is limited. They are partial 
truths, never to be ignored, but quite false if taken, Avithout 
modification, as practical rules of conduct. There are three 
species of competition in every market: that between sellers, 
that between buyers, and that between sellers on the one hand 



428 



FREE COMPETITION AND STATE ACTION 



[CH. U 



and buyers on the other. It is to the interest of the buyers 
that the sellers shall be numerous, eager, and freely com- 
peting. It is to the interest of the seller that supply shall 
be small, that sellers shall be united, and that buyers shall 
compete sharply. If at any point free competition is hin- 
dered, even the disciple of economic harmony must expect 
a discordant result. But in reality competition is rarely 
quite complete on both sides, and when it is not, the weak 
suffer. Men do not start with fair and equal opportunities. 
All that they may be entitled to under competition may be so 
little that social sympathy seeks to better the result; hence 
poor relief, public and private. Society as a whole has an 
interest in the outcome of the individual 's economic struggle. 
It cannot see men starving or driven into crime. But the 
argument need not be confined to such crude and extreme 
cases, for wherever economic interests are not in harmony 
and it is possible to further the social welfare, will not 
society be justified in acting? 



Imperfec- 
tions of 
economic 
fteedom 



§ III. SOCIAL LIMITING OP COMPETITION 

1. Undoubted evils result from some forms of competition 
U7ider the conditions actually existing. Complete freedom 
must remain a somewhat abstract ideal, and actual conditions 
must be recognized. Entire freedom of choice means freedom 
to make mistakes, a privilege whose enjoyment society cannot 
always permit. The child should be raised to good citizen- 
ship, and entire freedom of choice makes that impossible or 
improbable. The freedom of choice of the insane, the feeble- 
minded, and the criminal, cannot be recognized. Even where 
competition is the ideal of sound adult humanity, it is not 
to be too suddenly or extremely applied. The inequality of 
faculties, the prevailing dishonesty, the mass of inherited 
abuses, cannot be either ignored or at once ended. The 
immigrant from Europe, plunged into the trying conditions 
of city life, suffers in health and in morals, and often be- 



UII] SOCIAL LIMITING OF COMPETITION 429 

comes a burden upon society. One of many competitors may 
drive competition to an evil extreme. The "problem of the 
twentieth man" is presented when nineteen men desire to 
limit competition in ways not socially harmful, as by closing 
shops on Sunday or in the evening, and the one man refuses. 
The appeal to economic harmony often is the cry of "peace, 
peace, w^here there is no peace." The highest social result 
may be attained now by limiting, again by directing, in other 
cases possibly by fostering, competition. 

2. The main rivals of competition are custom, religion, Forces 
morality, combination, and state action. The first three of competition 
these were the strongest forces in the past and they are still 
operating; but combination and state action are more char- 
acteristic of the present. The influence of custom, of moral- 
ity, and of religion on value, has been touched upon at several 

points in our study; that of combination has been recently 
and more fully discussed. But state action, one of the most 
important of all the limitations, has been reserved for the 
concluding portion of our work. 

3. It is a function of the state to determine in part the The state's 
ways in which men shall exert their powers. This is not the Jf^gcwng 
sole function of the state, nor is its influence toward this end competition 
exclusive. The state puts limits to the physical rivalry of 

men. In the distant past no doubt physical rivalry between 
men was an agent of progress. The strong drove out the 
wrak ; physical contest developed more vigorous limbs, keener 
senses, and higher sagacity. To-day it is one of the principal 
functions of the state to suppress the physical contest be- 
tween men. The citizen is surrounded with a network of 
rules and regulations of whieli he is hardly conscious. INIost 
men easily avoid coming into contact with the police and 
feel no irksomeness in the control of the civil courts. The 
state regulates economic interests in many other ways; it 
controls the building of streets; it inspects the material and 
construction of houses; it forbids acts injurious to the public 
welfare; it regulates the issue of money; it determines the 



430 FREE COMPETITION AND STATE ACTION [CH. 44 

manner in which credit may be extended, the forms of 
taxation, and the direction which trade may legally take. 
The state has a part in shaping great industries of a public 
or semi-public nature, such as waterworks, railroads, and the 
postal system. 
Aim and The state is as wise as the men who constitute it. Men 

stateaction ^^^^^ mistakes, therefore men collectively will make them. 
The state regulates and limits— now wisely, now foolishly; 
but its aim is to preserve the benefits of competition without 
its evils, to lift the competition to a higher plane, and, by de- 
termining the direction in which men shall put forth their 
efforts, to give a higher and truer economic freedom. 



CHAPTER 45 
USE, COINAGE, AND VALUE OF MONEY 

§ I. THE PRECIOUS METALS AS MONEY 

1. Money we have defined as a material means of payment Money 

/ /- ^ defined and 

and medium of exchange, generally accepted and passing reviewed 
from hand to hand. The origin and function of money were 
set forth in the study of capital. The subject must now 
be approached from a different side and with the two-fold 
purpose of seeing whether there is anything peculiar in the 
relation of money to the general problem of value, and what 
is the influence of the action of the state on the value of 
money. The definition of money implies several ideas. 
First, the words "generally accepted means of payment" 
imply that money, as something bearing the stamp of so- 
cial approval, has a peculiar social character, is not an 
ordinary good. Second, the definition implies that money 
itself must be a thing having value, otherwise it could not 
serve as a medium of exchange. Exchange means the taking 
and giving of things of value. Money is, therefore, not 
merely an order for goods, as a card or paper requesting 
payment ; it is itself a thing of value, though this value may 
be due solely to its possessing the money function. This point 
is one of the most difficult in the subject. Third, the defi- 
nition implies that money is a material thing. The telegram 
when transferring an order for the payment of money, the 
spoken word, the promise to pay, etc., are not money. Fourth, 
it implies that money passes from hand to hand, is a thing 
that can be handled, and is or can be bodily transported. 

431 



432 



USE, COINAGE, AND VALUE OF MONEY 



[CH. 45 



Difficulty in 

applying 
the defini- 
tion 



Standard, 
or primary, 
money 



Gold-using 
countries 



The application of the definition is not always easy, for 
money shades off into other things that serve the same pur- 
pose and are related in nature. Even special students differ 
as to the border-line of the concept, but as to the general 
nature of money there is essential agreement. In many 
problems it appears to be at the same time like and unlike 
other things of value, and just wherein lies the dift'erence 
often is difficult to determine. The use of money is of such 
social importance, and it touches so many practica>l interests, 
that it raises many questions of a political and ethical 
nature. There are perhaps more popular errors on this than 
on any other one subject in economics. Yet the general 
principles of money are as fully understood and as firmly 
established as any parts of economics. 

2. The precious metals, gold and silver, are the standard, 
or primary, moneys in the world to-day. Primary, typical, 
standard money is the unit in which the value of the money 
of a country is expressed, no matter what its form is ; the 
standard is a certain weight and fineness of a particular 
metal. Coins of this standard are called full, or real, money 
by some writers who deny the title of money to everything 
else. It has been shown before that there has been an evolu- 
tion in the use of money. The more efficient forms, gold and 
silver, have competed with copper, iron, tin, cattle, salt, 
tobacco. In this contest silver had proved itself a few 
centuries ago to be the fittest medium of exchange, but in 
the last century gold has, among the leading nations, been 
displacing silver rapidly. In a higher degree than any other 
material, gold has the qualities of a good standard money in 
rich and industrially developed communities. The gold- 
using countries to-day are those of the western world. Eng- 
land for perhaps two centuries practically has had gold as 
its standard money; the United States since 1834 (except for 
the period of paper money from 1862 to 1879) ; Prance since 
about the year 1855, at which time she shifted from silver 
under the working of the bimetallic law ; and Germany, then 



^I] 



THE PRECIOUS METALS AS MONEY 



433 



more backward industrially, since 1873. Australia and 
Japan have reached that result only within the last few 
years, and Italy, Russia, India, Mexico— even China and 
other Oriental countries— are striving to attain it. 

In all these countries other kinds of money are used side 
by side with gold and silver. The actual money consists of 
a wide and confusing variety: silver, nickel, copper, paper 
in various forms and issued by various authorities. But 
among all the kinds, either gold or silver is found standing 
preeminent and in a peculiar position. The dil^eulties of 
the money problem must be attacked at the point of standard 
money where it is nearest to ordinary value problems and 
is less complicated than when the various money substitutes 
are included. Most of the fallacies regarding money have 
arisen not about standard money, but about paper and light- 
weight silver. 

3. Coinage is the act of shaping and marking a piece of 
metal to he used as money so as to indicate its weight and 
fineness. The precious metals can and do circulate as money 
without coinage. Any other mark equally plain and equally 
recognizable serves for many purposes just as well as the 
government stamp on the standard metal. The use of metals 
in antiquity was without coinage, by weight and test of fine- 
ness. In backward countries to-day most payments are made 
by weight. International payments are made by means of 
gold ingots that bear the mark of some well-known banking- 
house, and for that purpose gold bullion is money without 
the coiner's stamp. But for most uses government coinage 
has marked advantages. It is far more convenient for the 
average citizen to handle coins uniform in size and design 
than the diverse coins tliat would b(^ put out by private enter- 
j) risers. 

An established rate of fineness insuring uniform quality 
is a gi-eat convenience. In the United States all gold and 
silver coins are nine tenths fine; in Great Britain, eleven 
twelfths. The established weight of the gold dollar in the 

28 



Subordinate 
kinds of 
money 



Coinage 
defined 



Technical 
features of 
coinage 



434 



USE, COINAGE, AND VALUE OF MONEY 



I'CH. 45 



Seigniorag* 
defined 



Free or 

gratuitous 

coinage 



United States is twenty-three and twenty-two hundredths 
grains of fine gold or twenty-five and eight tenths grains of 
standard gold. The limit of tolerance is the variation either 
above or below the standard weight or fineness that a coin 
is allowed to have when it leaves the mint. The par of 
exchange between standard coins of different countries is 
the expression of the ratio of fine gold in them. Thus the 
par of exchange between the American dollar and the 
English sovereign (the "pound") is four and eighty-six 
and two third hundredths, that is, four and eighty-six and 
two third hundredths dollars contain the same amount of 
gold as an English gold sovereign. The embossed design, 
milled or lettered edges, and other similar devices are 
merely to make the coins easily rcognizable and difficult to 
counterfeit. 

4. Seigniorage is the right the ruler or state Jias to charge 
for coinage, or it is the charge made for coinage. Coinage 
as a function of great importance politically as well as eco- 
nomically was early exercised by governments or rulers. The 
prince, king, or emperor stamped his own device or portrait 
upon the coin ; hence the term seigniorage from seignior 
(meaning lord or ruler). The right to issue money came to 
be one of the most essential prerogatives of sovereignty. 
Coinage is rarely without charge, and often has been a source 
of revenue to the ruler. In the Middle Ages this right was 
frequently exercised by princes for their selfish advantage 
to the injury and unsettling of trade. 

When no charge is made for coinage, the coinage is said to 
be gratuitous. Coinage is said to be free if the subject or 
citizen can take bullion to the mint whenever he pleases, 
paying the usual seigniorage. Coinage is limited if the gov- 
ernment or ruler determines when coinage is to take place. 
Thus, coinage may be both free and gratuitous, when citizens 
are allowed to bring bullion whenever they please and have 
it converted into coins without charge or deduction. But 
coinage is free without being gratuitous when any citizen 



^1] THE PRECIOUS ilETALS AS MONEY 435 

may bring inetal to the mint, whenever he chooses, to be 
coined subject to the seigniorage charge. 

5. Where coinage is free and gratuitous the coin is worth Money 
the same as the bullion that is in it. This evidently and y*^"«"°^" 

•^ free coinage 

necessarily must be near the truth if the citizens exercise 
their right. They will not long keep metal uncoined in their 
possession when it is worth more in the form of money, nor 
will they long keep money from the melting-pot when it is 
worth more as bullion. Yet there may be a slight disparity be- 
tween the bullion and the money values before the metal is 
converted into coin or the coin melted down into metal. 
A motive for action must exist before either change will 
be made; but a thing cannot have considerably different 
values in two different uses at the same moment. 

There is here no special problem of value. The value of Adjustment 
gold as bullion and money is fixed by marginal demand. The vaiue'^ ^ 
several uses of gold are constantly competing for it : its 
uses for rings, -pens, ornaments, championship cups, pho- 
tography, dentistry, delicate instruments, and as a circulating 
medium. If the metal becomes worth more in one use, its 
amount there is increased and correspondingly diminished 
in the others. The supply likewise is influenced by changes 
in price. Gold-mining is one among various industries to 
which men may apply their labor and capital. Some mines 
are superior, others average, others marginal which it barely 
pays to work. There is, therefore, a rise and fall of the mar- 
gin of production with change in price and change in cost 
of production. If at a given moment, when it barely pays 
to work a mine, gold becomes worth less, that mine will go 
out of use. As gold rises, some mines tliat did not pay be- 
fore, come into use. A similar variation has been noted in 
the case of marginal land, marginal factories, marginal 
forges, and marginal agents of every kind. 

The question was once asked in Parliament, "What is a "Whatisa 
pound?" and a good (|uestion to ask in beginning the study 
of money is, "What is a dollar?" The answer, so far as it 



dollar?" 



436 USE, COINAGE, AND VALUE OF MONEY [CH. 45 

refers to the standard money, is : a dollar is a convenient 
name applied to twenty-three and twenty-two hundredths 
grains of fine gold or twenty-five and eight tenths grains of 
standard fineness. The exchange value of gold varies in dif- 
ferent places and conditions, but the name remains the same. 
A dollar exchanges for more wheat in Dakota than in New 
York or for more iron in Pittsburg than in Oregon, yet it is 
sometimes asserted that the value is always the same because 
the name is always the same. The fallacy of this may be 
seen in the equivalent expression that twenty-three and 
twenty-two hundredths grains of gold have the same value 
alw^ays and under all circumstances. 

The problem of the bullion value of money metal, under 
gratuitous coinage, presents no special difficulties. The ordi- 
nary theory of value applies to it. The difficulties of the 
money question begin at the point where the money value is 
seen to diverge from, and depend on, something else than the 
value of the bullion. Yet in the principles just discussed 
are found a firm foundation for any further study of the 
question. 

§ II. THE QUANTITY THEORY OF MONEY 

The money 1. The fundamental use that money serves is to apportion 
incomes of goods so as to make them yield the maximum grat- 
ification. Money first increases utility by increasing the ease 
with which exchange takes place. Like any tool or agent, it 
is valued for what it does or helps to do. But further, it 
enhances the sum of enjoyments by the division of goods into 
proper quantities, making them available at the best time. 
It follows from the principle of diminishing utility that the 
particular time at which goods are available for wants has 
an essential bearing on their value. A hundred loaves of 
bread in the hands of a single individual would mold long 
before they could be consumed. Money enables men in soci- 
ety to acquire these hundred loaves in a series so that they 



use 



§11] THE QUANTITY THEORY OF MONEY 437 

can be used when most needed. Money is the most suc- 
cessful device man has ever discovered for distributini? the 
supplies of a journey along its course, and the goods of daily 
need over a period of time. The use of money as a 
storehouse of value is merely an extreme case of keeping 
things for the future when they will have a greater gratify- 
ing power. 

The fact that money is essentially a valuable good kept 
on hand as the best possible' provision against emergencies 
points to the essential nature of the money demand. Money 
is sought, in order to form a cash reserve, up to a point where 
the loss from keeping it balances the probable gain. The 
money use is subject to the law of diminishing utility ; beyond 
a certain point its added convenience is purchased at too 
great cost. Every man may be thought of as having an 
average, or usual, money demand, which is that proportion 
of his income that gives him more utility retained in money 
form than if at once expended. A man with an income and 
expenditure of fifty dollars a month paid monthly has use 
ordinarily for no more than fifty dollars as his cash reserve. 
While under ordinary circumstances this is his maximiun 
demand, various circumstances may diminish it. If his ex- 
])enses are distributed in two equal parts (the one on pay-day, 
the other thirty days later) his average money demand is 
twenty-five dollars, not fifty dollars. If most of his pur- 
chasing is done at the beginning of the month, his average 
money demand may be perhaps ten dollars. Many a work- 
man ])nrchases on credit, spends his fifty dollars within an 
hour after he receives it, and goes without money for the 
I'cst of the month. The average demand of a community 
for money reijulred as a reserve is affected by the methods of 
(hung business. With a given method of use a reduction in 
the supply of money results in loss of time ami waste of 
effort; an increase in tlie supply results in a lowering of its 
value relative to other things. In either case the equilibrium 
of the marginal utilities of income must be restored. The 



Concept ot 
the money 
demand 



Variation in 
the average 



438 



USE, COINAGE, AND VALUE OF MONEY 



[CH. 45 



The quan- 
tity theory 
of money 



Example of 
its applica- 
tion 



thought of an average, rational, money demand relative to 
money income is the fundamental requisite for clear thinking 
on the question of money, but to grasp this thought there 
is needed a certain power of scientific imagination lacking 
in some minds. 

2. The quantity theory of money is that, other things 
leing equal, the value of money falls as its quantity in- 
creases, and vice versa. This is an abstract statement of a 
concrete and difficult problem. The phrase "other things 
being equal" betokens the statement of a tendency where 
there are several unknown factors. In recent discussion the 
quantity theory of money has been questioned by some 
critics; yet it is held by most economists to be merely the 
general law of value as applied to money. There are three 
sets of facts to be brought into relationship with each other 
in the quantity theory: (1) amount of business or exchanges 
to be effected; (2) the methods by which this is done; (3) 
the amount of money available to do it. According to the 
quantity theory we must expect that when conditions (1) 
and (2) remain fixed, the value of money wall vary inversely 
as its quantity. This conclusion follows from the conception 
of the money demand as the value of circulating medium 
that bears an average proportion to the value of goods ex- 
changed. 

Let us consider various conditions. When a number of 
men, by reason of increasing gold supplies, get larger stocks 
of money than they have had, the former proportion between 
their money incomes and their money is altered. In re- 
ducing their stock of money by buying goods they bid up 
the prices of goods until the total value of goods exchanged 
again bears the same ratio as before to the total value of 
money. Taking an extreme case: if twice as many dollars 
get into circulation in a community, either some few men 
must have several times as many dollars as before, while 
others have the same; or every man will have his due pro- 
portion, just twice as much as before. The latter, "other 



§11] THE QUANTITY THEORY OF MONEY 439 

things being equal," must be the logical result after equi- 
librium has been restored. Is any other result thinkable? 
Now if prices of goods remained the same as before, there 
would be twice as great a value of money available to effect 
exchanges. There is no reason why each should tie up twice 
as large a proportion of his income in a supply of the medium 
of exchange. If, however, there is a concerted movement to 
spend the surplus money, there results a general bidding 
down of the exchange value of money, a general bidding up 
of prices of goods. At what point will this movement stop ? 
The rational conclusion must be that ''other things being 
equal" equilibrium will be reestablished only when the ratio 
between the value of money and the price of goods becomes 
the same as before. The money being doubled, prices must 
be double, and likewise for any other change in quantity. 
- 3. The quantity theory is misunderstood, and is criticized objections 
on the around that the facts oppose it. If but one kind of ™a<ietothe 

' , • • -, P -p quantity 

metal were used as money, and this were coined of uniform theory 
weight and fineness, the problem would be comparatively 
simple. But in fact gold and silver, full-weight and light- 
weight coins, circulate side by side. More mysterious still, 
the money in circulation is partly coin and partly paper. 
How can the quantity theory hold in these conditions? Sev- 
eral objections to the quantity theory are presented. It is 
said, first, that prices do not vary exactly with the per capita 
circulation of different countries at a given moment. The 
per capita circulation in Mexico may be five dollars and in 
the United States twenty-five dollars, while prices are much 
less than five times as great here as in Mexico. Secondly, it is 
said that prices do not vary directly with changes in the 
amount of money in a given country. There is now perhaps 
five times as much money per capita in the United States as 
fifty years ago and yet prices are not five times as high. 
Tliirdly, it is said that credit methods change, and therefore 
that money does not fix prices. Fourthly, it is said that even 
if true of primary money the theory fails to apply to actual 



440 



USE, COINAGE, AND VALUE OF MONEY 



[CH. 45 



The objec- 
tions 
examined 



Not a per 
capita rule 



Recognizes 
the growth 
of trade 



Recognizes 
use of credit 



Not confined 
to primary 
money 



conditions with many forms of money in circulation side by 
side. Fifthly, it is said that there are too many unknown 
quantities to permit the rule to be used. 

4. A reasonable interpretation of the quantity theory 
makes it a statement of the effect of a change in a single 
factor. The objections to the quantity theory assume that it 
is a statement of what occurs under all conditions, instead 
of what it is, an index to the working of one condition at a 
time. The foregoing objections need but to be further an- 
alyzed to show that in each of them it is not merely the 
quantity of money, but a number of other factors that differ 
in each of the propositions. We may note briefly in turn the 
defects in the arguments of the preceding paragraph. 

First, the quantity theory does not remotely imply that 
prices in different countries differ at a given moment accord- 
ing to the per capita money. In the case of the United States 
and Mexico not only the amount of exchange per capita but 
the method of exchange, and the rapidity of the circulation 
of money differ quite as much, doubtless, as does the per 
capita circulation. The quantity theory would lead any 
fairly careful student to a conclusion the exact opposite of 
that which its critics have twisted from it. 

Second, the quantity theory does not imply that during 
a period of years when a country is changing in a multitude 
of ways, as in population, methods of industry, modes of ex- 
change and transportation, and in wealth and income, the 
prices will vary directly either as the absolute or per capita 
amount of money does. In the light of the quantity theory 
the inquirer must be led to just the opposite of the ridiculous 
conclusion imputed to it. 

Third, the theory does not overlook the effect of an in- 
creased use of credit, for it fully implies that any such a 
change, by economizing the use of money, would enable the 
same amount of money to support a higher scale of prices. 

Fourth, the theory does not overlook the variety of forms, 
and is not true merely of primary money. However great 



§11] THE QUANTITY THEORY OF MONEY 441 

this variety, the money demand of individuals and of com- 
munities still represents a pretty definite ratio of the value 
of exchanges effected. If the primary money alone were 
doubled in quantity, while the various forms of substitute 
money (smaller coins, bank-notes, government notes, etc.) 
remained unchanged, the quantity of money as a whole would 
not be doubled, and according to the theory, prices would not 
be expected to double. Indeed, in such a case, the method of 
exchange would be very greatly altered, and the case is fully 
covered by the statement of the theory. 

Fifth, despite the number of changing factors affecting isaprac- 
the methods of exchange, the method of business, etc., the 
quantity theory is a rule usable at any moment. These 
various factors change slowly, and the quantity theory an 
swers the question. What change occurs in prices as a result 
of an increase or decrease of the money in a given community 
at a given moment? Like the law of gravitation, the law of 
projectiles, and the statement of the chemical reaction to be 
expected when making new compounds, the theory must 
be interpreted with practical limitations. When the quan- 
tity theory is thus stated and understood, its negation is un- 
thinkable, as is evidenced by the involuntary use made 
of it constantly by every one of its few critics in explaining 
the simplest monetary phenomena. 

5. The quantity theory malies intelligible the great and Practical 
rapid changes in price that have followed sudden changes of the^^ '"" 
in the money supply. Inductive demonstration of broadly t^eo"^*^ 
stated economic principles is difficult, but in no other eco- 
nomic problem is laboratory experiment so nearly possible 
as in that of money. ]\Iany inflations and contractions of the 
circulating medium have occurred, now in a single country, 
again in the entire world, and the local or general results 
have served to exemplify richly the working of the quantity 
principle. With the scanty yield of silver- and gold-mines 
in the Middle Ages, prices were low. After the discovery of 
America, especially in the sixteenth century, quantities of 



442 



USE, COINAGE, AND VALUE OF MONEY 



[CH. 45 



Recent 

price 

changes 



silver flowed into Europe. The great rise of prices that 
occurred was explained by the keenest thinkers of that day 
along the essential lines of the quantity theory, though there 
were many monetary fallacies current at the time. The 
experience in England during the Napoleonic wars, when the 
money of England was inflated and prices rose above those 
of the Continent, led to the modern formulation of the theory 
by Ricardo and others. The discovery of gold in California 
and Australia, in 1848-50, increased the gold supply marvel- 
ously, and gold prices rose throughout the world. Between 
1870 and 1890 the production of gold fell off greatly while 
its use as money increased and prices fell. A great increase 
of gold production has occurred in the period since 1890. 
In part the rising prices from 1897 to 1910 are explicable 
as the periodic upswing of confidence and credit, but in the 
main doubtless they are due to the stimulus of increasing 
gold supplies. These are but a few of many instances in 
monetary history which, taken together, make an argument 
of probability in favor of the quantity theory so strong as to 
constitute practically its inductive proof. 

6. The following table shows the production of gold in 
the world since 1811, values being given in million dollars 
($1,000,000) as annual averages by decades until 1890, and 
by years thereafter. 



_ Decade. 


Value. 


Year. 


Value. 


Year. 


Value. 


1811-20 


8 


1891 


131 


1901 


261 


1821-30 


10 


1892 


147 


1902 


297 


1831-40 


14 


1893 


158 


1903 


828 


1841-50 


36 


1894 


181 


1904 


347 


1851-60 


133 


1895 


199 


1905 


380 


1861-70 


126 


1896 


203 


1906 


403 


1871-80 


107 


1897 


236 


1907 


413 


1881-90 


108 


1898 


287 


1908 


443 






1899 


307 


1909 


454 






1900 


255 


1910 





CHAPTER 46 

TOKEN COINAGE AND GOVERNMENT PAPER 

MONEY 

§ I, light-wt;ight coins 

1. When the numher of coins issued is limited properly, seignior- 
a seigniorage charge docs not reduce their money value; thevaiue 
they are worth more as money than as iullion. The coinage "^ <=oms 
thus far considered has been that of full-weight coins with- 
out seigniorage. The question now is, What is the effect 
of a seigniorage charge on the value of the coin as com- 
pared with the bullion that is in it? This is one of the 
most difficult phases of mruetary theory. Two values must 
be thought of: one the value of the coin as money, the other 
the value of the bullion in it. When coinage is free and 
gratuitous, these two values are the same. How can they 
ever be different? The answer to the question is found in 
the theory of monopoly value. If the supply of coin is lim- 
ited by the sole agency of issue, the value can be kept above satura- 
the cost of production {i.e., in this ease the bullion value), fo°r"coin°* 
the seigniorage being the profit of the government. The *se 
limit within which the coinage must be kept is the nimiber 
of coins that would circulate freely if they were made full 
weight without a seigniorage charge. This is the "saturation 
point" of the money demand of the country; it is a certain 
number of pieces of full-weight metal. If more than that 
amount gets into circulation it becomes worth less as money 
than as bullion, and it is melted or exported. 

If this full supply of money at a given moment is 100,000 

443 



444 



TOKEN AND PAPER MONEY 



rCH. 46 



Example 
of seign- 
iorage 
value in 
coins 



Example 
of excess 
and depre- 
ciation of 
coins 



Medieval 
examples 
of depre- 
ciation 



pieces or dollars, a seigniorage charge of ten per cent, could 
be made if the pieces were not increased in number above 
100,000. The government alone having the right of coinage, 
the need of money would give the circulating medium a 
monopoly value. The value of the money would rise until 
the coin would buy one ninth more bullion than was in it, but 
if there were any further rise the citizens would begin to take 
metal to the mint. After the ten per cent, charge was taken 
out they would receive a coin which, though containing one 
tenth less bullion, would be worth very nearly the same as 
the metal taken to the mint. No considerable depreciation 
could take place unless the volume of business fell off so 
that less money was needed than at the old standard. In 
that case there would be no outlet for the excess of coins un- 
til they fell to their bullion value, i.e., till they lost the 
entire value of the seigniorage, the monopoly element in 
them. Melting or exporting them before that point was 
reached would cause the loss of whatever element of seignior- 
age value they contained. 

Assuming that the volume of business, or sum of ex- 
changes, remains unchanged, let us consider what will re- 
sult if the government begins to issue "on its own account." 
The number of coins might be increased until the total 
money value equalled the original 100,000 full-weight coins, 
at the bullion price, at which point exportation would take 
place. There being nine tenths as much precious metal 
as before, it would require ten ninths as many pieces, or 
111,111 pieces, to have as great a value as the 100,000 had 
before. At this point there is no further profit to the gov- 
ernment in issuing coins of that weight. To make a further 
profit it must again reduce the amount of pure metal in 
the coin. 

This is essentially what occurred often throughout the 
Middle Ages. A ruler debased the quality or reduced the 
weight of money, but for a time the new coin, having the 
same money use, circulated as freely as the old coin. If, 



g I] LIGHT-WEIGHT COINS 445 

as SO often happened, the ruler yiehled to the temptation 
to issue more in order to get the profit, the older, heavier 
coins at once began to go abroad or into the melting-pot. 
Then occurred a fall in value, mystifying alike to the prince 
and to the people. The reason is now perfectly plain: the 
number of pieces issued had not been kept within the proper 
limits, and the coins went down to their bullion value. 

2. Suhsidiarif coins of liglitcr weight than the standard, DiiHcui- 
if properly limited, ivill remain in circidation at par. fiai.^ight 
Money to serve all of its purposes must be of different coins^^*'^^ 
denominations. The amount required of each denomination 
is determined by the volume of exchanges for which each is 
most convenient. Each kind of money, as the penny, nickel, 
dime, has its own peculiar demand and its saturation point. 
For the smaller denominations the standard metal is not 
suitable ; a gold dollar cannot well be cut into twenty or a 
hundred pieces. Thus copper, nickel, silver remain in re- 
stricted use. When these are issued at their bullion value, 
difficulties arise ; not only are they too heavy, but as they 
varv in bullion value, some of them now and then become 
worth more as bullion than as coin, and suddenly disappear 
from circulation. 

This happened often throughout the ]\Iiddle Ages and Adoption 
until the nineteenth century. Gold and silver generally we/glit*^ 
were coined at a ratio of weight corresponding exactly to ^^1°^ 
their market ratio at a given moment, and every time the 
market conditions varied, one kind of the money went out of 
circulation, and the country was left either without the 
larger gold coins, or without subsidiary coin, or "small 
change." At length the plan was hit upon of issuing a 
limited number of subsidiary coins of less than full bullion 
value, that is, as "token coins." By this plan there is 
jziven to the minor coins a value greater than that of the 
liullion in them. The small profit made by the government 
on every penny, nickel, or dime issued, is a seigniorage 
charge. These minor coins, in somewhat confusing variety, 



446 



TOKEN AND PAPER MONEY 



[CH. 46 



Theory of 
light- 
weight 
coins 



Gresham's 
law 



Proper in- 
terpretation 
of Gresh- 
am's law 



circulate side by side with full-weight money, their value 
depending on the monopoly principle. The result of a large 
issue of any one denomination would be a lowering of its 
value. In practice their issue is determined by the needs 
of business and by the requests of citizens for small coins 
in exchange for standard money. One needing "change" 
gets it at the bank; when the bank finds its supply falling 
short it gets more from the government mints. As business 
increased in 1898, the demand for nickels, dimes, and quar- 
ters became unprecedented, and the mints worked night and 
day to supply them, 

3. Gresham's law of the circulation of coins of different 
hullion value is: had money drives out good money. Thiw 
so-called law was named of late for Sir Thomas Gresham 
who explained it to Queen Elizabeth when counseling her 
to recoin the debased money of the realm as was done 
in 1560. He showed that when worn and new coins 
were used together, the lighter ones remained as money, 
while the heavier ones were picked out by jewelers and 
by those needing to send money abroad. For like reasons 
it happens that when two metals, as gold and silver, may 
be legally coined at a fixed ratio in weight, and the market 
ratio of the two metals as bullion changes, the one rising 
in value goes out of circulation and ceases to be further 
coined. 

Gresham's law needs some explanation, for it is frequently 
misunderstood. "Bad" money means money that has not 
the bullion value equal to its money value, money that is 
either debased in quality or light in weight. But not every 
piece of bad money will drive out every piece of good money. 
If that were so, a single bad penny would drive out of 
circulation all the gold. The law applies only under certain 
conditions. The "good" will leave the country only if the 
total amount of money in circulation is in excess of what 
would be needed if all were of full weight of best quality. 
Paradoxically speaking, if there is not too much of the bad 



§11] PAPER MONEY EXPERIMENTS 447 

money, it is just as good as the good money. The good 
money may not leave the country. It may be hoarded, or be 
picked out by banks and savings-institutions to retain as 
their reserve, or be melted for use in the arts. Gresh- 
am's "law" is thus a practical precept: keep the amount 
of token or light-weight coin limited to the field of its 
peculiar use, or it will cause the other forms, the fuller 
weight money, to leave for a better market. That better 
market may be the melting-pot or it may be a foreign 
country. 

4. In recent monetary practice has been well shown the 
effect of limiting the coinage, thus imparting a monopoly 
value to the money in circulation. Most notable cases have 
been in India, which in 1893 closed her mints to the free 
coinage of silver, in the Straits Settlements in 1904-06, and 
in the Philippine Islands after 1908. In every case the 
value of the standard coin was determined not by its value 
as bullion, but by the amount of money in circulation. 

§ II. PAPER MONEY EXPERIMENTS 

1. Government paper money may 'be defined as money Nature of 
for which a seigniorage of one hundred per cent, is charged. 
The order in the study of the money question is from 
seigniorage to paper money, because paper money embodies 
the principle of seigniorage in its extremest form. The 
issue of paper money grew out of the practice of debasing 
metal. The gain of seigniorage from paper money is greater 
and is just as easily secured. Government paper money is 
sometimes called "political money," in contrast with money 
whose value rests on the value of its material. In this sense, 
however, all coins containing an element of seigniorage, or 
m(mopoly value, are to that degree "political" money. The 
typical paper money is irredeemable, that is, it cannot be 
turned into bullion money on demand. It is simply put 
into circulation with the "legal-tender" quality. The legal- 



paper 

money 



448 



TOKEN AND PAPER MONEY 



[CH. 46 



The legal- 
tender 
quality 



Examples 
of paper 
money in 
the eight- 
eenth cen- 
tury 



tender quality is imparted by the declaration of government 
that the money must be accepted by citizens as a legal 
discharge for debts due them. The object of this is to 
compel people to use it as money whether they will or not. 
The purpose of the government in thus employing its power 
over the circulating medium is usually to profit, that is, to 
gain the seigniorage for the public treasury. Paper money 
differs from bank-notes in that it does not depend 
for its redemption on the credit of the issuer. It differs 
from bonds in that its value is not based on the interest 
it yields, but solely on its money uses. The issue of 
paper money may save the government the payment of 
interest on an equal amount of bonds. The promise to re- 
ceive paper money in payment for taxes or for public lands, 
may help to maintain the value of the notes by reducing 
their quantity, but nothing short of prompt exchange for 
standard coins makes them truly redeemable. 

2. The most notable examples of paper money in the 
eighteenth century were the American colonial currencies, 
the continental notes, and the French assignats. In all the 
American colonies before the Revolution, notes or bills of 
credit were issued which were in most cases legal tender. 
Without exception they were issued in large amounts and 
without exception they depreciated. Parliament forbade 
the issues, but to no effect. The continental notes were is- 
sued by the Continental Congress in the first year of the 
war (1775), and for the next five years. The object at first 
was to anticipate taxes, and it was expected that the states 
would redeem and destroy the notes, but this was not done. 
The notes passed at par for a time, but depreciated rapidly 
as their number increased. The country had less than 
$10,000,000 of coin before the war, and when, in 1780, over 
$200,000,000 of notes were in circulation they were com- 
pletely discredited; hence the phrase "not worth a conti- 
nental." Specie quickly came back into use. A few years 
later the leaders of the French Revolution, failing to learn 



I II] PAPER MONEY EXPERIMENTS 449 

the lesson of the American experience, issued, on the security 
of land, notes called assignats in such enormous quantities 
that they became worth no more than the paper on which 
they were printed. In a figurative sense they may be said 
to have fallen to their "bullion" value. 

3. Notable examples of paper mo7iey in the nineteenth Morere- 
century were the English hank-notes in the years 1797- pies of 
1820, and the American greenbacks, 1862-79. There have ^^^^^^ 
been many other examples. During the Franco-Prussian 
"War, France, through the medium of its great state bank, is- 
sued notes which only slightly depreciated. Within recent 
years many countries — Russia, Austria, Portugal, Italy, all 
the South American republics — have had depreciated paper 
currencies. The English bank restriction of 1797-1820 is 
especially notable because it gave rise to the controversy 
which did most to develop the modern theory of the subject. 
The Bank of England was forbidden to redeem its notes in 
coin because the government wished to borrow all the coin the 
bank had. The result was the issue of a large amount of 
bank money not subject to the ordinary rule of redemption 
on demand. It was virtually government paper money. 
The notes depreciated and drove gold out of circulation, and 
not until 1820 was there a return to specie payments. 

The United States under the constitution did not trj^ paper The green- 
money till 1862 when paper notes (called greenbacks, be- 
cause of the color of ink with which the reverse side was 
printed) were issued as a war measure to the amount of 
about $450,000,000. Other interest-bearing notes were is- 
sued with legal-tender quality and circulated as money to 
some extent. Greenbacks depreciated in terms of gold, and 
gold rose in price until, in June, 1864, it sold at two hundred 
and eighty a hundred. Fourteen years elapsed after the war 
before these notes rose to par, in terms of gold. 

4. Paper-money issues usually have had injurious effects evii effects 
on general industry. The purpose of the issue of paper °ca? money 
money is generally to relieve the financial necessities of the 

29 



450 TOKEN AND PAPER MONEY [CH. 46 

government. It is a costly expedient, resorted to only in 
desperate extremities. A result usually unintended is the 
derangement of business and of the existing distribution of 
incomes. The rapid and unpredictable changes in prices 
give opportunity for speculative profits, but injure legitimate 
business. This incidental effect on debts and industry offers 
the main motive of some citizens in advocating the issue. 
Paper-money issues are peculiarly liable to be the subject 
of political intrigue and of popular misunderstanding. 

§ III. THEORIES OF POLITICAL MONEY 

commod- 1- The Commodity -money theorists declare that govern- 

uieory"^^ wietif is poiverless to influence value, or to impart value to 
paper hy law. There are two extreme views regarding the 
nature of paper money, and a third which endeavors to find 
the truth between these two. First is that of the commodity- 
money theorists, or the cost-of-produetion theorists, who will 
not admit that there is any other basis for the value of 
money than the cost of the material that is in it. Money 
made of paper, on a printing press, has a cost almost neg- 
ligibly small, and, therefore, they say it can have no value. 
The fact that it does circulate, and is treated as if it had 
value, is explained by the commodity theorists as follows: 
While the paper note is a mere promise to pay, with no value 
in itself, it is accepted because of the hope of its redemp- 
tion, just as is any private note. Depreciation in this view 
is due to loss of confidence ; the rise toward par measures the 
hope of repayment. Such a view overlooks the feature in 
which paper money differs from ordinary credit paper. The 
value of one's promise to pay depends on his reputation and 
his resources; the resources constitute the basis of value. 
Bonds have value because they yield interest and are pay- 
able at a definite time in standard money. But paper money, 
lacking this basis for its value, has another basis in its money 
use, in its power to buy goods. The money demand in con- 



nil] THEORIES OF POLITICAL MONEY 451 

nection with the monopoly power of government over the 
money supply, furnishes a satisfactory logical explanation of 
the value of paper money. 

2. The fiat-money advocates assert that government has Fiat- 
iinlimitcd power to maintain the value of paper money by uieory 
conferring upon it the legal-tender quality. The meaning of 

flat is "let there be," and the fiat-money advocates believe 
that the government has but to say, "let it be money," to 
invest paper with value. The typical fiat advocates in the 
United States were the " Greenbackers, " those voters who 
wished to retain the paper money issued in the Civil War, 
and to increase its amount greatly. They saw in paper 
money an unlimited source of income to the government. 
They proposed the payment of the national debt, the support 
of the government without taxes, and the loan of unlimited 
money without interest to citizens. All might live in luxury 
if the extreme fiat-money theorists could realize their dream. 
There are still some survivors of this faith in the power of 
the government fiat. The depreciation that has taken place 
in every case where government notes have been issued, they 
declare to be due to a too mild enforcement of the law of 
legal tender. To them the fact that paper money may circu- 
late for a time at par appears a reason why it always should. 
They do not admit that there is a saturation point in the use 
of money, and that its use is still further limited b}^ the 
fear of larger issues. They do not see that the ultimate basis 
of the value of paper money is economic, — is in its money 
use, not in the fiat of the government. 

3. A sound theory of paper money makes it a special case Abstract 
of monopoly value. It has been seen that the power of almost of ^g^od^ 
every monopoly over price is relative, not absolute. As the paper 

-^ . . . . money 

power of a great private corporation over the price of its 
product is limited, so is that of the government over the 
value of political money. The money use is the source of 
value to the paper notes. Business conditions remaining un- 
changed, the limit of possible issue without depreciation is 



452 



TOKEN AND PAPER MONEY 



[CH. 46 



the number of units in circulation before the paper money 
was issued, the saturation point of full-weight and full-value 
coins. Because governments generally have not stopped at 
that point, paper money has depreciated. Popular error and 
selfish interests force legislation beyond the reasonable limit. 
In a few cases only have there been public integrity and cour- 
age enough to retrace the steps before great harm resulted. 
It is principally this lack of control that prevents paper 
money from being a good circulating medium. Changes in 
the supply of money raise or lower the prices of many kinds 
of property and incomes, and thus affect the welfare of 
nearly every member of society. 

4. The following data on prices and money have interest 
in connection with the subjects discussed in this and the 
succeeding chapters. 





-. 




"■ 














at 


elative 
r capita 
iulation 




Gold 

in 
enbacka 




Prices 
L860 as 
base.- 


Prices 
890-97 
s base.* 




Prices 
860 as 
base.* 


Prices 
890-99 
s base.* 




» '^ ^4 


"i-( 


£ 




*^ 


r-l a 




iH 


\h 03 




ft-" 




^ 














1860 


100 


100 




1880 


107 




1900 


90 


110 


1861 


101 


101 




1881 


106 




1901 


89 


108 


1862 


74 


118 


113 


1882 


108 




1902 


92 


113 


1863 


129 


149 


142 


1883 


106 




1903 


93 


114 


1864 


142 


190 


203 


1884 


99 




1904 


92 


113 


1865 


148 


217 


157 


1885 


93 




1905 


95 


116 


1866 


137 


191 


141 


1886 


92 




1906 


100 


123 


1867 


132 


172 


138 


1887 


93 




1907 


106 


129 


1868 


133 


160 


140 


1888 


94 




1908 


100 


123 


1869 


127 


153 


133 


1889 


94 




1909 


103 


127 


1870 


126 


142 


115 


1890 


92 


113 


1910 


107 


133 


1871 


131 


136 


112 


1891 


91 


112 


1911 






1872 


131 


139 


112 


1892 


87 


106 


1912 






1873 


130 


137 


114 


1893 


86 


106 








1874 


131 


133 


111 


1894 


79 


96 








1875 


124 


128 


115 


1895 


76 


94 








1876 


116 


118 


111 


1896 


74 


90 








1877 


112 


111 


104 


1897 


74 


90 








1878 


111 


101 


101 


1898 


76 


93 








1879 


120 


97 


100 


1899 


83 


102 









' Based on figures given in Statistical Abstract of U. S., 1909, p. 710, which 
include the whole population, North and South. 

* In gold before 1862 and after 1879; in greenbacks, 1862-79. Figures to 
1890 from Aldrich report; thereafter from the Bureau of Labor, correlated 
with the Aldrich base of 100. 

' Yearly average. 

* Figures of the Bureau of Labor, the base of 100 being average of 1890-99. 



CHAPTER 47 
THE STANDARD OF DEFERRED PAYMENTS 

§ I. FUNCTION OF THE STANDARD 

1. The standard of deferred payments is the thing of Definition 
value in which, by the law or hy contract, the amount of a ll^^^^^.^ 
debt is expressed. A credit transaction is a lengthened ex- 
change; one party fulfils his part of the contract, the other 

party promises to give an equivalent at a later date. The 
equivalent may be in any kind of goods ; for example, in bar- 
ter one may part with a horse on the promise of a cow to be 
received later ; or a small horse on the promise of a large one ; 
or a flock of sheep on the promise of its return at the end of 
the year with a part of the increase of the flock. A simple 
standard in which to express the debt is the thing borrowed, 
as horse, sheep, wheat, house, etc. This involves the use of 
the renting contract. Again, the thing to which the value 
of debts is referred may be a thing quite different from the 
goods borrowed, and with the growth of the money economy 
and the use of the interest contract, money comes more and 
more to be used as the standard. The parties express the 
debt in terms of the standard unit established by law. 

2. The importajice of the standard of deferred payments increasing 
increases with the use of money and with the amount of out- "nt^erest^^ 
standing debts. Until the use of money develops, the use of contract 
credit is difficult and limited ; it becomes easy when the value 

of all things is expressed in terras of a common circulating 
medium. If all business were done with cash tliere would be 
no great interests affected when a change in the value of 

453 



454 



THE STANDARD OF DEFERRED PAYMENTS [CH.47 



Great ef- 
fects of 
money 
changes 



money occurred. Every dollar would change in value in the 
hands of the holder, but there the effect would cease. But 
the volume of outstanding debts expressed in terras of money 
now exceeds many fold the total value of the circulating 
medium. The value of all these debts changes in the same 
proportion as does that of the standard unit of money ; when 
this is cheapened either by law or as a result of increasing 
supplies, a creditor to whom a thousand dollars are due 
loses the same as if he had a thousand metal dollars locked 
up in a safe. 

Outstanding contract debts may be roughly divided into 
three classes : short-time loans, running less than a year ; 
medium-time, running from one to five years ; long-time, run- 
ning over five years. Fluctuations are rarely rapid and 
great enough to affect appreciably the debtors and creditors 
in the case of short-time loans. The results are greater in the 
ease of long-time loans, such as national, state, and city debts, 
bonds of corporations, mortgages given by farmers on their 
land or by owners of city real estate, A multitude of inter- 
ests are affected by a change in the value of money. When, 
as in the years 1873-96, money gains in purchasing power 
(prices fall) receivers of fixed incomes are gainers. When, 
as after the year 1896, the value of money falls, the rev- 
enues from educational and charitable endowments, the 
salaries of public officials, and all fixed incomes, lose pur- 
chasing power. In a capitalistic age, therefore, almost every 
individual is affected in some way by a change in the value 
of money. In most cases the change escapes recognition ; 
people do not trace out the relation that an industrial change 
bears to their own interests. In a few notable cases, how- 
ever, the change has been revolutionary as in the period 
following the discovery of America, when the feudal dues 
had come to be expressed in terms of money instead of 
labor services. In modern times, the mass of debts being 
greater than ever before, such changes as those following 
the discovery of gold in California or the decrease in gold 



J I] FUNCTION OF THE STANDARD 455 

production between 1873 and 1890 have the gravest economic 
results. 

3. The best standards of deferred payments available — Merits of 
the precious metals, gold and silver — are still imperfect, ff sliver as 
The good that is most convenient as a standard of deferred standards 
payments is the one used as money. Gold to-day is con 

stantly expressing the value of all other things. Borrowers 
prefer to make loans in the form of the general medium of 
exchange. From the usage of speaking of all things in terms 
of money, the false idea arises that the value of other things 
changes, but that the value of gold is always the same. 
Money is no such a fixed objective standard as a foot-rule or 
a pound weight. The value of gold rests on the estimates 
made by men, and is constantly changing according to condi- 
tions. A fixed objective standard of value is not possible of 
attainment. The value of the precious metals is stable as 
compared with most things. The current new supply is com- 
paratively regular. For generations at a time there may be 
no radical changes in the output of gold and silver. For 
centuries there was no change in the methods of extraction. 
Recent inventions, however, have considerably altered these 
conditions. The nature of the use of gold and silver, like- 
wise, is such as to make the demand for them, under ordinary 
conditions, most stable. The precious metals are but slowly 
worn out; only a portion of the annual output is used in 
the arts ; there is, therefore, a large reservoir into which flows 
steadily a small stream ; the existing stock is twenty or thirty 
times the annual output. Yet the value of the standard 
metals is never quite stable, and sometimes several influences 
combine, as in the last century, to affect their value greatly 
and suddenly. 

4. Various ideals for a standard of deferred payments various 
have been suggested — as return of equal enjoyment, of equal l^^g^^H^^ 
sacrifice, social expediency ; and various standards — as labor, 
commodities, and the tabular standard. The ideal standard 

of deferred payments is one that will insure justice be- 



456 



THE STANDARD OF DEFERRED PAYMENTS [CH. 47 



Sacrifice 



Labor 



tween borrower and lender. Different views have been taken 
as to what constitutes justice in this matter. The suggestion 
is attractive that the sum when returned should represent the 
Enjoyment same amount of enjoyment as it did when it was borrowed. 
Such a standard is impossible of realization in any general 
way, for men's circumstances are constantly changing. To 
insure even to the average man the same amount of enjoy- 
ment is only roughly possible. The same goods do not afford 
the same enjoyment when conditions have changed. An- 
other suggestion is that the goods returned should represent 
the same sacrifice as those loaned. Here again the difficulty 
is in the lack of an objective standard. Whose sacri- 
fice? That of the lender, who may be rich, or that of the 
borrower, who may be poor ? Some have supposed the condi- 
tions of equal sacrifice were met by the labor standard, 
according to which the sum returned should purchase the 
■same number of days of labor as when borrowed. But what 
kind of labor is to be taken, that of the lender or that of the 
borrower, or that of some one else? Labor is of many 
different qualities, which can be exactly compared only 
through their objective value in terms of some one good. 
The ideal of equal enjoyment has been supposed to be 
realized by the tabular standard, which consists of a number 
of leading commodities in fixed proportions. The money 
returned is to be enough to purchase the same goods at the 
expiration as at the making of the loan, and thus may be 
a larger or smaller sum than was borrowed. While this does 
not, as is sometimes claimed, insure equality of enjoyment, 
it averages the fluctations of many goods, and thus prevents 
great extremes. This standard has been favored by notable 
monetary authorities, but the difficulties of its practical ap- 
plication are prohibitive. 

It must be recognized that any possible concrete standard 
of deferred payments will sometimes work hardship to indi- 
viduals. The best average results for justice and social 
welfare will be secured by measuring debts in goods that 



Tabular 
standard 



J 11] INTERNATIONAL BIMETALLISM 457 

change least often, least rapidly, and in the least unpredict- 
able manner. Gold thus far has proved itself worthy to 
serve as the standard. 



§ II. INTERNATIONAL BIMETALLISM 

1. The fall of prices in 1873 and the following years Examples 
meant a great change in the standard of deferred payments, auctua^ 
The monetary changes following the discovery of America *^°°8 
were due to the inflow to Europe of great quantities of silver 

taken by force from the native American rulers, and from 
the rich mines. Silver, at that time throughout Europe the 
main standard of deferred payments, was thus greatly low- 
ered in value. This change lightened all outstanding obliga- 
tions, lowered the money rents of the peasants, and the cus- 
tomary dues of labor wherever they had come to be expressed 
in money form. By the third quarter of the nineteenth 
century gold had become in Europe and America the main 
standard, though silver still served as such in some coun- 
tries. The output of gold in 1849-57 caused the greatest 
money inflation that had occurred since the sixteenth century, 
favoring in a similar manner the debtor classes. The substi- 
tution of gold for silver by some countries at that time, by 
making a great additional market for gold, helped in some 
degree to check the fall in its value. 

The decline in the output of gold was a change of the oppo- The re- 
site character, causing a fall of prices and increasing the jau'o^"** 
burden of debts. From 1873 to 1896 there was almost con- Prices 
stant decline of the prosperity of the agricultural classes, 
due in part to this money influence, but in part to influences 
which cannot be dwelt upon here, as they had nothing to do 
with the money question. There was complaint, agitation, 
and demand for relief on the part of many interests in 
France, Germany, England, and the United States. 

2. Bimetallism, the use of two metals as standard moneys, Bimetai- 
was the remedy proposed. Bimetallism is legally complete an^i*^®' 



458 



THE STANDAKD OF DEFERRED PAYMENTS [CH. 47 



Object of 

interna- 
tional bi- 
metallism 



Itfi theoiy 



when both metals are admitted to the mints for free coinage 
at an established ratio of weight; it is halting or limping 
when one of the metals is not freely coined. Bimetallism 
may be legally authorized, but not actually working. As 
soon as the legal ratio varies appreciably from the market 
value, only one of the metals will in fact be brought to the 
mint. National bimetallism is confined to a single country, 
as that in the United States before the Civil War, or in 
France before 1867. International bimetallism is an agree- 
ment among several nations to use two metals on the same 
terms, the only case in history being that of the Latin Union, 
which included France, Italy, Switzerland, and other coun- 
tries. The discussion of international bimetallism between 
1878 and 1892 was with the purpose of forming a larger 
league of states than the Latin Union, embracing all the 
leading countries. 

3. The main object of international himetallism is to 
prevent the fluctuations of the standard of deferred pay- 
ments. Commercial dealings between gold-using and silver- 
using countries are of great magnitude, and the use of differ- 
ent standards leads to many difficulties. Fluctuations in the 
ratio of the two metals occasion much uncertainty and loss 
to individual traders. The rise in the value of gold meant 
an increase in the burden of the public debts of silver-using 
countries which collect their revenues in silver, but which 
must pay their debts, principal and interest, in gold. 

The theory of bimetallism is that the government can act 
on the value of the two metals through the principle of 
substitution. The metal tending to become dearer will not 
be coined, the other will be coined in greater quantities. The 
degree of influence that can thus be exerted on the value of 
the two metals depends on the size of the reservoir of the 
metal that is rising in price. When it all leaves circulation, 
the law on the statute book permitting it to be coined becomes 
a mere sounding phrase. In such a case there is bimetallism 
de jure, but monometallism de facto. The greater the league 



§111] THE FREE-SILVER MOVEMENT IN AMERICA 459 

of states, the greater is the likelihood that the scheme will 
work. The economic theory of bimetallism was recognized 
b}^ a majority of economists to be abstractly sound, but the 
political difficulties in the way of international agreements 
are great, and have proved to be insurmountable. 

§ III. THE FREE-SILVER MOVEMENT IN AMERICA. 

1. International bimetallism, despite many efforts, failed conditions 
of adoption. This brief proposition sums up the history of the de? 
the movement, from 1878 to 1892, to form a league of states ^g^^i^er 
and an agreement for international bimetallism. Interna- 
tional conferences were held, and taken part in by the lead- 
ing financiers of the world. France at first favored the 
policy, and the United States was always foremost in advo- 
cating it, while England in the main was opposed. Some of 

the advocates of bimetallism argued that the fall of prices 
was due not alone to economic forces, but also to a money 
conspiracy which had influenced legislation to introduce and 
continue the gold standard. This, of course, was strenu- 
ously denied. It is true that the commercial classes found 
gold the form of money most suitable to large business, 
and no doubt class interest entered into the question in some 
measure. The difficulties of the debtor class in America were 
peculiarly great, owing to the inflated paper currency, from 
1862 to 1879, which had made our conditions quite abnormal. 
In the period of speculation following the Civil War an 
enormous mass of debts had been accumulated. The hopes 
of thousands of tillers of the soil suft'ering from a fall in 
prices, and of the great debtor class, clamoring for relief, 
were centered upon the success of this movement. Banking 
and other large business interests in general opposed it. 

2. The plan of the free-silver advocates ivas to legalize Purpose 
national bimetallism in the United States at a ratio between free-siiver 
gold and silver very different from the market ratio. Gold '"°^®™^"* 
had become, long before 18G0, the real st<andard of our 



460 THE STANDARD OF DEFERRED PAYMENTS [OH. 47 

money system, and after 1873 it was the only metal admitted 
to free coinage. Silver, little by little, was losing purchasing 
power in terms of gold, until from being worth, in 1873, one 
sixteenth as much, ounce for ounce, it became, in 1896, worth 
but one thirtieth as much as gold. It must be recognized 
that the power of silver to purchase general commodities fell 
much less than the change in its ratio to gold would indicate, 
gold having risen in terms of most other goods as well as of 
silver. Nevertheless, the proposal to open the mints to free 
silver at sixteen to one in the year 1896 meant a sudden 
and marked cheapening of money. The prime purpose was 
to lighten the burden of debts by making the standard of 
deferred payments cheaper. It was at first a debtors' move- 
ment, but to succeed it had to enlist the support of other 
large classes of voters. And thus, by force of political 
necessity, but doubtless in large part naively, it developed 
into the more sweeping theory that wages, welfare, and pros- 
perity called for a larger supply of money independently 
of the effect on debts. 
The free- In its extreme form the free-silver plan was a fiat scheme, 

for some of its supporters believed that by the mere passage 
of the law the two metals could be made to bear to each other 
any ratio desired. But its most intelligent and high-minded 
advocates (who were moved to its support by a sincere sym- 
pathy and concern for the distressed agriculturalists) recog- 
nized fully that the force of the law was limited by economic 
conditions. The extreme opponents of the plan, ignoring 
the evident fact that the adoption of a metal as a standard 
money is one of the most essential of the market conditions, 
denied that government action could in any way affect the 
value. Most of the arguments presented on either side in the 
political campaigns showed little evidence of a sound theory 
of money. The victory of the gold standard in 1896 and 
1900, it would seem, was due more to the well-founded fear 
that a sudden change of the money standard would cause a 
panic, than to a thorough understanding of the question. 



silver 
theory 



§ III] THE FREE-SILVER MOVElStENT IN AMERICA 461 

3. The increase of the gold output has for the present increase 
checked the fall of prices. After 1860, for a number of production 
years, the output of gold continued, with some fluctuations, 
to fall until, in 1883, it was less than a hundred mil- 
lion dollars. At the same time, nations which recently had 
gone over to the gold standard were accumulating stocks of 
gold for their banks and general circulation. After 1883, 
with the opening of new gold-yielding territory in South 
Africa and in the Klondike, the annual output of gold in- 
creased rapidly. The methods of extracting gold fifty years 
ago were still in large part of a primitive sort. Now in- 
tricate machinery has taken the place of crude tools, chem- 
ical processes have been introduced, and the principal prod- 
uct results from the regular and certain working of deep 
mines rather than from chance surface discoveries. Great 
masses of debris can now be reworked profitably. In many 
parts of the world are enormous deposits of low-grade ores, 
before useless, that now can be worked economically. For a 
generation at least the world 's supply of gold is likely to con- 
tinue larger than ever before in history, and prices in terms 
of gold probably will rise. 

Though no change seems likely or possible at the present Rising 
time, the free-silver advocate has been justified by events t/^poraiT 
against those gold advocates who said that the amount of soi"Wo° 
money had nothing to do with prices. Prices have gone up 
as gold has increased. The free-silver advocates got what 
they wanted through a change for which neither party could 
claim the credit. Yet the present situation is unsatisfactory 
and undeveloped. A standard better than a single metal, 
more stable than a single commodity, is desirable if it can 
be found. The money question must arise again and in a 
new form before many years. The difficulty has not been 
finally settled ; it is but postponed. 



The essen- 



CHAPTER 48 
BANKING AND CREDIT 

§ I. FUNCTIONS OF A BANK 

1. A hank is a business whose income is derived chiefly 
from lending its promises to pay. Banks have passed 
•**^^unc^ through many changes in the past three centuries. Originat- 
tion ing on the street corner for exchange of money, they have 

evolved into great institutions of many forms, and per- 
forming many functions. The definition seems paradoxical, 
but it expresses what in modern thought is the essential 
feature of a bank: the lending of its credit. A reserve of 
money is needed by the man of business. But for the banks 
each man would have to keep his reserve in his own till. 
Except the small sums needed by individuals for current 
uses, these reserves can be kept more economically by banks 
than by individuals. A bank, like a large factory, has the 
advantages of large production. 

The process of lending credit is called deposit and dis- 
count. It grew out of the deposit of actual money for 
safe keeping and the loaning to borrowers by the method 
of discounting their notes. The term now has a somewhat 
different meaning, for a merchant may obtain a deposit to- 
day without putting any money in the bank. He gets the 
bank to discount his notes or collateral security, and to enter 
the sum to his credit as a deposit. He becomes a depositor 
by borrowing, not by lending to the bank. The sum is under 
the borrower's control; he can check it out when he wishes; 
but he usually keeps a certain balance to his credit. The 
bank's gain is larger than ordinary interest, because it gets 

462 



§ I] FUNCTIONS OF A BANK 463 

a discount on the large sums left in its possession. The bank 
increases its funds also by attracting deposits from those 
who do not care to borrow. 

2. Functions not essential to hanking are ordinary money- other 
lending, money-changing , exchange to distant points, safe u"uauy 
deposits, and issue of hank-notes. Banks often lend in the Performed 
ordinary way, allowing borrowers to draw the money out at 

once, but this is not the business they prefer. Many indi- 
viduals and corporations, such as endowed charities, colleges, 
insurance companies, lend great sums of their own money 
without thereby partaking in any degree of the peculiar 
character of banking. Money-changing (the exchange of 
coins of different countries) is done by banks, but likewise 
by many other agencies not sharing the essential banking 
character. Foreign and domestic exchange is the issue and 
cashing of " drafts " for money payments between distant 
places. Most banks are well fitted to perform this function, 
but some banks do not undertake it, and it is performed also 
by some business houses that are not banks. Safe deposit 
is the keeping of things to be returned in identical form, as 
silverware, notes, and papers. By banks in small towns 
this is sometimes done freely, sometimes for a slight charge ; 
Init in large cities safe-deposit vaults are generally quite un- 
connected with banks. Even bank-note issue is not essential 
tn banking; most banks in the United States issue no notes, 
others issue very few. All these functions may be united 
under one management, but the essential banking function 
is deposit and discount. 

3. The income of hanks is derived from discounts, infer- sources of 
est on their own capital, charges for exchange and collection, ofVa^kT^ 
rents on investments, and profit from the loan of their hank- 
notes. The income of banks is drawn from different sources, 
according to the size of the community and the nature of the 

Ijanks. While in the villages and smaller cities they perform 
a number of functions, in the larger cities they usually 
specialize in a far greater degree. Like every other enter- 



464 BANKING AND CREDIT [CH. 48 

prise, a bank must start in business with some paid-up capi- 
tal as a guarantee of credit. Further security is afforded by 
the limited liability of shareholders for losses, in proportion 
to their capital stock. The same amount of money could be 
loaned with less trouble and more cheaply without starting 
a bank, but used as a banking capital it can be loaned in part 
while still serving to attract money deposits. Charges to 
smaller customers for exchange are a source of income to 
some banks, but in many cases this service is freely per- 
formed for regular customers and becomes a considerable 
expense. Banks make few investments in real estate or other 
physical property; it is, in fact, their duty to keep out of 
ordinary enterprises, but they are forced sometimes to take 
for unpaid debts things that have been held as security. 
Profits on bank-notes have at times been the main, possibly 
the sole, motive for starting banks; but that is not the case 
to-day when the right of issue is so strictly limited. 
Productive 4. Ba7iks are productive economic agents performing im- 
of'b^nk^g portant industrial services. False ideas have long been en- 
tertained about the magic power of banks to produce wealth 
from nothing. To many, banks are a mystery much like 
paper money. Their opponents sometimes have pictured 
them as vampires fattening on the blood of industry. That 
they are misused at times is undeniable, but, like other 
economic agents, they are to be judged by their net effi- 
ciency. The bank is a tool performing services similar to 
those of money. For some purposes money is an awkward 
and costly agent in comparison with banks. For remitting 
payments from New York to San Francisco or Hong Kong, 
money is a medieval device. Money can more safely be en- 
trusted to a bank than to a strong chest in one's own house. 
The man who refused to make use of banks in this day would 
isolate himself economically, and would soon find himself 
out of any but the smallest business. He could no more get 
along without the banks than without the post, the telegraph, 
or the telephone. 



§11] 



TYPICAL BANK MONEY 



4G5 



The eatherinsr by the banks of loanable funds, reduces The bank 

° o ^ as a labor- 

hoarding, makes money move more rapidly, and creates a saving de- 

eentral market between borrowers and lenders for the sale ^*^® 
of credit. AVhile not creating more physical wealth directly, 
it adds to the efficiency of wealth ; it oils the bearings of the 
industrial machine. To abolish banks would be to destroy 
labor-saving machinery. Banks perform incidentally a 
further service in developing better business methods in 
the community. They enforce promptness and exactitude 
in business dealings. In supplying credit to enterprises, 
banks are constantly passing judgment on the collateral 
security presented to them and on the solidity of the enter- 
prises that are seeking support. This gives great economic 
and business power to bankers, especially where through a 
community of interest a group of men exercises a practical 
monopoly of business-credit in any community. 

Because in their public nature banks are very analogous 
to money, they have always been looked upon as properly 
subject to more supervision than most private business, and 
government has always exercised a considerable measure of 
control over them, sometimes for good, sometimes for evil. 



§ II. TYPICAL BANK MONEY 

1. Typical hank money consists of notes issued hy hanks Nature of 
on the credit of their general assets, without special regula- ^^^^^ 
tion bylaw. As no two leading countries have quite the same money 
system of bank-notes, the subject is a difficult one. It is 
well to begin, therefore, with a clear conception of typical 
bank money, unregulated by government. Such a form of 
note is one with which few now living in the United States 
have had any experience, as the present national bank-notes 
differ in essential ways from the typical form. Typical 
bank-notes are notes issued by banks as a means of loaning 
their credit. The borrower, instead of receiving a credit 
balance at the bank subject to check, gets notes which he 

30 



466 



BANKING AND CREDIT 



[CH. 48 



Bank- 
notes 
viewed as 
commer- 
cial paper 



Bank- 
notes 
viewed as 
a form of 
political 
money 



hands on to other men. These notes are returned for re- 
demption to the issuing bank as soon as any one wishes 
specie in their stead. The limit of the issue of such notes 
is the need of the community for that form of money, and 
if they are promptly redeemed in gold on demand, they never 
can exceed that amount. A holder of a note (in the absence 
of special regulations) has the same claim on the bank that 
a depositor has. As it is to the interest of the bank to keep 
in circulation as many notes as possible, there is a tempta- 
tion to abuse the power of note-issue, to which many banks 
yielded in the period of so-called " wild-cat banking " before 
the Civil War. 

2. Bank-notes are viewed hy some as a form of commer- 
cial credit. Typical bank-notes are not legal tender, and 
every one has the legal right to take or refuse them as he 
pleases. It is therefore said by some that bank-note issue 
is of no special concern to the state, that it can safely be 
left to individual self-interest. It is said that if one has 
little faith in a note, he may refuse to accept it. But in re- 
ality every one is compelled to take the money that is current. 
The average citizen cannot know the credit of distant banks, 
and thus has not the same power of judging wisely in taking 
bank-notes that he has in making deposits in the bank of 
his own neighborhood. Between bank-notes and ordinary 
promissory notes, there are other differences of a nature 
pretty generally recognized. Bank-notes pass without en- 
dorsement and thus depend on the credit of the bank alone, 
not like checks, on the credit of the person from whom 
received. They yield no interest to the holder. They are in- 
tended to be used as money and are so used. Thus they 
come near to paper money in their nature, and the banks are 
near to exercising the right of coinage. 

3. By others, hank-notes are considered to he almost iden- 
tical with government paper money. Some opponents of 
bank-note issue declare that it is usurpation of the prerog- 
atives of government, and that no power but the sovereign 



§11] TYPICAL BANK MONEY 4G7 

state should issue money. While many in America to-day 
hold this view, the comparison probably is false and strained. 
Typical bank-notes, unlike inconvertible paper money, de- 
pend for their value on the credit of the bank, not on their 
legal-tender quality and on political power. They must be 
redeemed on penalty of insolvency, government notes need 
not be, and yet will circulate at par if properly limited. 

"While these differences mark off government paper money 
pretty sharply from typical bank-notes, it must be noted 
that in many cases actual bank-note issues have been far 
from this typical form. In the days of "wild-cat" banking, 
bank-notes were issued in excess and fell below par, yet the 
man in a Western community who dared to ask the bank to 
redeem the notes in specie was not only frowned on by the 
bank, but condemned by the public, which felt that business 
was endangered by such a demand. Redemption on demand 
would have required a reduction of the amount of money in 
circulation and would have caused a fall in prices. Inflation 
of the bank currency went on with results almost identical 
with those following an excessive issue of government paper 
money. Not formal law but public opinion made such bank- 
notes essentially political money. 

4. The public nature of tank money has led to many poucyof 
forms of public regulation of their issues. Bank-notes thus uJa^tio'ii'^^f' 
stand midway in their economic nature between political bank-notes 
money and private notes, sharing something of the character 
of each. An extreme analogy in either direction is mislead- 
ing. It is of great social importance that the circulating 
medium should be reliable. The least possible amount of the 
citizen's energy and thought should be required to decide 
whether the^oney is good or bad. Nevertheless, those op- 
posed to state interference in industry declare that if the 
citizen is not left to look out for himself, the growth of 
stupidity will be encouraged; and they say that it is no 
more essential for the state to guarantee the quality of bank- 
notes than the quality of woolen cloth or of sugar. Few, 



468 



BANKING AND CREDIT 



[CH. 48 



however, take so extreme a view, and it is generally held 
that it is a function of the state to issue in a greater or 
less degree the quality of the money in circulation. The 
actual bank-notes of the leading countries are thus of many 
varieties. The Canadian notes are the most nearly typical 
bank-notes issued to-day ; those of Germany come next, while 
those of the United States have little of the typical character. 



rorms of 
banks in 
the United 
States 



§ III. BANKS OF THE UNITED STATES TO-DAY 

1. The three forms of hanks in the United States are pri- 
vate, state, and national. Any one with a little capital may 
become a private banker. There are "curbstone brokers" 
in almost every town, and some of the great financial houses 
are private banks. But the law will not allow this to go very 
far. Some states will not allow a man to put up a sign 
announcing himself as a banker unless he complies with 
certain banking laws. In some states even private banks are 
subjected to the same inspection as the state banks and are 
required to make the same reports to the state officials. 
State banks are those organized under special state banking 
laws. They are usually subject to inspection by state-bank 
commissioners, must make regular reports, and are required 
to comply with certain rules as to their reserves, rates, and 
investments. In any case they do not issue bank-notes, be- 
cause the national laws now tax the notes of state banks so 
heavily that they are unprofitable. National banks, the larg- 
est and most important portion of our banking system, were 
authorized by law in 1863, during the Civil War. They are 
subject to stricter regulation and inspection than are other 
banks, and that regulation is perhaps an advantage to them, 
as it strengthens public confidence in their stability. Yet 
this regulation does not insure the depositors against loss, 
as some national banks fail every year. They may be or- 
ganized, with $25,000 capital in towns not exceeding three 
thousand population, with $50,000 in towns not exceeding six 



§ III] BANKS OF THE UNITED STATES TO-DAY 469 

thousand, with $100,000 in cities not exceeding fifty thou- 
sand, and with $200,000 in large cities. 

2. Oil)' national bank-notes have no essential mark of Nature of 
typical bank money. The one marked peculiarity of the tionai 
national banks of the United States as compared with those bank-notes 
of other countries, is their mode of note-issue. They per- 
form well all the other functions of banks, essential and un- 
essential, but they may or may not, at their option, issue 
bank-notes. The legal condition to such issue is that bonds 
of the United States shall be purchased in the open market 
and deposited with the treasurer of the United States. Until 
1900, notes might be issued only to ninety per cent, of the 
value of the bonds deposited ; but now they may be issued 
up to the par value of the bonds. The notes, being secured 
by the bonds, rest on the credit of the government, not 
on the credit of the bank. These notes are not promptly 
sent back for redemption to the banks issuing them, as is 
done with typical bank-notes. They may circulate thou- 
sands of miles away from the bank that issued them, and for 
years after that bank has gone out of business. They are 
not an "elastic currency" increasing or diminishing with the 
needs of business. The changes in their amount depend 
upon the chance of the banks to make more or less in this 
way than by any other use of their capital, and this in turn 
depends largely on the price of bonds and on the rate of 
interest they bear. From 1864 to 1870, fortunes were made 
from this source, but in recent years there has been little 
opportunity of gain from note-issues. They are subject to 
a tax of one-half of one per cent, when two per cent, bonds, 
and of one per cent, when bonds bearing a higher interest, 
are deposited. These regular bank-note issues are not on 
a logical basis, and satisfy no one entirely. They are of 
no great importance either to the bank, to which they afford 
little profit, or to the public, for which they do a service 
ecjually well done by silver certificates, greenbacks, or coins. 

Along with the discussion of the currency has gone, since 



470 



BANKING AND CHEDIT 



[CH. 48 



Suggested 
reforms of 
the bank- 
note sys- 
tem 



Bank reg- 
ulation a 
protective 
measure 



1896, a vigorous discussion of the banking system. The 
two problems are so closely related that a change in the one 
suggests readjustment of the other. One extreme plan is to 
abolish bank-notes entirely and to replace them with addi- 
tional issues of greenbacks; the other extreme plan is to 
authorize the issue of almost typical bank-notes. A modifica- 
tion of the Canadian banking system, which has great merits, 
is held up for imitation. Bills have been repeatedly before 
Congress authorizing the maintenance of a general guarantee 
fund w^ith which the notes of failed banks could be re- 
deemed, and at the same time authorizing branch banks such 
as those in Canada ; but public sentiment has never strongly 
favored this plan. 

In 1908 provision was made for emergency notes in times 
of financial stress, to be issued through national currency as- 
sociations of not less than ten banks with aggregate capital 
and surplus of at least $5,000,000. A bank that is a mem- 
ber may, under certain conditions, get and issue additional 
bank-notes on the deposit of ' ' any securities, including com- 
mercial paper." The banks of each association are jointly 
and severally liable for the redemption of these emergency 
notes, which are subject to a tax of five per cent, per annum 
the first month, progressing one per cent, a month to ten 
per cent. The same act provided for the National Monetary 
Commission to inquire into the whole monetary system. 
The report of this commission was completed in 1911. 

That the control of banking is an important duty of gov- 
ernment is the conclusion of the practical world. The vari- 
ous banking systems of the leading countries embody differ- 
ent plans for the one purpose of the adequate control of 
banking in the public interest. Government control of bank- 
notes is felt to be of the same nature as factory inspection, 
that is, to be a protective measure. When public interests 
are at stake and private interests conflict with them, govern- 
ment acts to forbid one citizen from doing harm, and to pro- 
tect other citizens from injury. 



CHAPTER 49 
TAXATION IN ITS RELATION TO VALUE 

§ I. PURPOSES OP TAXATION 

1. Provision for the expense of organized government is Taxation 
the fundamental purpose of taxation. Taxation may be de- 
fined as the taking by the government of private property 
for public uses. This implies a certain degree of compulsion. 
When the national government accepts ten million dollars in 
trust for the Carnegie Institution, it is not taxation, though 
wealth is given for public uses. The effects of taxation per- 
vade all industrial affairs, but they will be discussed here 
only in relation to the value of goods and to the distribution 
of incomes. By taxation the government interferes with the 
individual's free choice and with the impersonal economic 
forces. It expends income in different ways from those 
which would be chosen by the individual. 

The primarj^ purpose of taxation is public defense. War Taxation 
often has driven men into closer social relations. Public defense ^ 
defense requires sacrifice on the part of the family and of 
the individual. In family or patriarchal communities all 
share a common income and combine in the common de- 
fense, but self-preservation compels such small communities 
to form a larger, stronger state for the common defense. 
Personal service in the field gives place to money taxes 
permitting a more regular, continuing, and perfect organiza- 
tion of military forces. 

Next comes the need of civil government to insure domestic serve do- 

,.-, .,.. -i^ in6stic 

tranquillity. As political unity grows, the citizens need less order 

471 



472 



TAXATION IN ITS RELATION TO VALUE 



[CH. 49 



Develop- 
ing public 
wants ; 
social and 
industrial 
welfare 



often protection against foreign foes, and they need more 
often, relatively, defense against the aggressions of some of 
their own countrymen. The preservation of domestic order 
requires police, courts of justice, and other agencies. The 
ideal of the anarchist to do without government is nowhere 
realized. Everywhere there must be government to preserve 
peace and to protect property. Unfortunately, this need 
grows with the growing density of population. Crime in- 
creases when men swarm in great cities. To maintain and 
operate the social machinery requires ever-increasing re- 
sources. The courts which settle disputes between men, and 
which interpret their contracts, are agencies of peace, dis- 
placing physical contests. Many other public expenses tend 
to grow, as those for legislative bodies, public buildings, 
statistical inquiries, the printing of public documents. 
Government on these accounts has become in modern times 
an increasingly costly institution. 

2. The promotion of the social and industrial welfare of 
society has come to he an important purpose of taxation^ 
Some functions of government, less essential than the pri- 
mary ones just mentioned, seem naturally to grow out of 
them. In a democratic society, popular education is one of 
the necessary conditions of good government, as it appears 
that domestic order is not possible in a democratic state with- 
out intelligent citizens. Step by step the functions of gov- 
ernment are widened. Some industrial functions are per- 
formed by the government in connection with the primary 
needs. Light-houses are necessary to guide the navy, but 
they also sei^ve to guide the merchant marine and to aid 
industry. The post was established as an agent of political 
and military government to connect the ruler with the out- 
posts (a fact the name post indicates), but the postal service 
has grown in every country to be a great industrial and 
social agency. The consular service, beginning in the polit- 
ical need of keeping official representatives in foreign lands, 
has become a valuable economic agency; consuls are com- 



§1] PURPOSES OF TAXATION 473 

mercial travelers, advancing the trade-interests of their 
countries in all quarters of the globe. These social and in- 
dustrial functions have been increasing of late. As the 
national and local governments engage more in industry, 
they usually make larger demands in the shape of taxation. 

It is along the border-line between the primary and the The 
secondary purposes of taxation that the contest goes on thestate' 
regarding the proper functions of government. If they are «^p*°^s 
to stop short of the extreme of socialism, where shall the 
line be drawn? The movement has been of late toward 
greater government activity; more of the wants of men are 
thus supplied through the agency of the state. Year by year 
a greater sum is taken by taxation and spent for the citizen. 
The toll-road becomes a public road, the toll-bridge becomes 
free, more is supplied by taxation for schools, for advanced 
research, and for technical training. In our country great 
wealth was given by the Morrill Act to scientific and tech- 
nical schools. The state universities, against much opposi- 
tion, have become in many states of the Union the dominant 
educational force. Moreover, taxation often is used as a 
means not merely of raising revenue, but of discouraging 
one kind of industry and encouraging another. One indus- 
try wanes or dies under increasing burdens, another waxes 
strong by fostering exemptions and bounties. A large share 
of this "protective legislation" is done under the guise of 
taxation. 

3. Shifting of the limits of state action and corresponding oovem- 
changes in the weight of taxation are constantly affecting ^ons\xmv- 
value and incomes. Society as a whole is made up of many tiongood 
groups of industry. Government is the largest of these, col- means of 
lecting and expending more than any individual or corpora- ^^° 
tion. Government is in one aspect a consumption good. In 
return for its collective cost men collectively get the enjoy- 
ment of social organization, markedly in contrast with the 
uncertain ties and hazards of primitive communities. But 
government becomes also a mode of social investment, an 



474 



TAXATION IN ITS RELATION TO VALUE 



[CH. 49 



Apportion- 
ing of the 
cost 



indirect agent, a productive enterprise. Wealth applied 
through it secures a greater product than is possible by- 
individual action. Government can maintain light-houses 
more economically than individuals could otherwise secure 
them. 

But when the government undertakes these various tasks, 
the expense falls unequally on individuals and affects differ- 
ently their incomes. When free schools take the place of 
private schools, the law compels every one to contribute to 
education. To many individuals it is a matter of indiffer- 
ence whether they pay tuition or taxes, but the wealthy 
bachelor sometimes grumbles when forced to help in educat- 
ing the day-laborer's family of twelve. The average result 
may be right, but individuals diverge from the average and 
thus have constantly a motive to attempt to change the 
limits of governmental action. Happily the subject is not 
always viewed with selfish eyes. The ethical and patriotic 
thought is not, "How will this affect my interests?" but, 
"How will it affect the general interests?" But as the 
question of value is always involved, men are usually found 
favoring or opposing a measure of taxation according as it 
affects their own income. Thus taxation is inevitably an 
economic question. 



§ II. FORMS OF TAXATION 



The vari- 
ous forms 
of taxes 



On in- 
comes 



1. Taxes usually are a portion taTten from the income 
arising from labor or from wealth. In rare cases more than 
the net income of wealth may be taken, but the aim of 
taxation in general is to take only a portion of the income 
for public uses. As economic income has many sources, it 
may be intercepted at many different points, and taxation 
may take various forms. First, private income may be 
appropriated by a tax on income. This is the simplest in 
thought, but the administrative difficulties of the income- 



§ II] FORMS OF TAXATION 475 

tax are great in practice. It is not easy to determine the 
money value of the various sources of enjoyment that come 
into a man's possession in the course of a year, including, 
as the ideal requires, the immaterial gratifications along 
with the material. A second form is a tax on property in on prop- 
proportion to value. Since the value of material wealth is ^^ ^ 
the capitalization of the rentals at the prevailing rate of 
interest, the property tax, so far as it applies to material 
wealth, and if it were accurately assessed, would take an ap- 
proximately equal proportion of incomes. It would be in 
some respects better than a tax on actual rents, for it reaches 
the prospective, or speculative, rental. A third form of tax on expen- 
is one on consumption, or expenditure. This is but another ^^^^^^ 
mode of attacking income, for in the long run income is 
spent, not always by the individual who earned it, but, by 
some one, and thus it is reached by a tax on expenditure. 
The principal consumption taxes in the United States are 
the tariff duties and the internal revenues of the national 
government. In time of war, internal revenues are ex- 
tended in the United States to a multitude of articles, but 
usually the}'- are limited (with minor exceptions) to liquor onbusi- 
and tobacco. A fourth form of tax is one on selected agen- ^^^^ 
cies of industry; such are business taxes, licenses, taxes on 
investment in business, corporation taxes, etc. These bur- 
dens are diffused and rest eventually on some income, rarely 
to be ascertained exactly. Actual tax systems combine these 
forms in great variety, subtracting many minute frac- 
tions from each citizen's income in ways unsuspected by 
him. 

2. The immediate effect of a change in the form of tax- changes of 
at ion is a change in the market value of goods. If the new anTin'cap- 
tax reduces the net rent of any productive agent, it reduces itaiization 
likewise its value, which is but the capitalization of its net 
rental. If taxes are taken off of factories and put upon 
farm rents, factories rise and farm-land falls in value. The 
immediate change in value is much greater than the annual 



476 TAXATION IN ITS RELATION TO VALUE [CH. 49 

tax, for if five dollars is to be taken permanently from the 
annual rental of the farm, nearly one hundred dollars is 
taken at once from its selling value. 

Taxes are reckoned by enterprisers as a part of the cost 
of production whenever the conditions of competition and 
of substitution make it possible to do so. In such a case the 
products rise in price and most of the tax falls upon the 
consumers. In the Civil War an increase in the tax on 
whisky increased its selling price, and distillers who owned 
stocks on which a smaller tax had already been paid reaped 
profits of millions of dollars. When recently the tax on tea 
was increased in England, all dealers who had accumulated 
a stock before the law went into effect were gainers. Every 
change in taxation inevitably affects, either favorably or 
unfavorably, many interests. The chance to anticipate a 
change in tax laws or to get, from those in power, informa- 
tion of a proposed change, makes speculation possible and 
political corruption profitable. 
Shifting 3. After every change in taxation, competition among 

dencTof bargainers goes on and a new equilihrium of prices results. 
taxation The citizen who pays a tax into the public treasury is not 
always the one whose income is reduced in the long run. In 
most cases the final and regular burden of the tax is dis- 
tributed over a number of incomes. The passing on of the 
burden is called the shifting of the tax; the location of the 
final burden is called the incidence of the tax. The law- 
maker cannot tell exactly where the weight will fall. The 
principles of value give some guidance in the inquiry, but 
the workings of the principle are difficult to follow. Cer- 
tain it is that the new tax, both in its collection and in its 
expenditure, becomes a new influence in industry. Some 
occupations are made more attractive, others less so. Some 
places are made more, others less, desirable to live in. As 
property thus fluctuates in value, as investments become 
more or less remunerative, the market price of corporation 
stocks rises and falls. The rate of adjustment varies greatly 



§111] PRINCIPLES AND PRACTICE 477 

under different conditions. The inflow and the outflow of 
labor and capital are more or less rapid in the various in- 
dustries. 

The fact that a change in taxation is a disturbing element Many 
in price is not to be thought insignificant merely because fncom"? 
"all comes out right in the end." Every change in taxation affected 
is an element of uncertainty in business and increases the 
fortunes of some men at the expense of others. Hence no 
considerable change should be made without good reasons in 
its favor. The older taxes have the virtue of stability, but 
in many cases they have grown out of harmony with the 
industrial conditions. While, therefore, from time to time 
there is a real need of a reform in the tax system, it should 
not be undertaken without recognizing the many and com- 
plex interests involved. 

§ III. PRINCIPLES AND PRACTICE 

1. Taxation should he adjusted with reference to the gen- various 
eral social interest. Many standards have been suggested ^^^^^^^^^ 
to measure the distribution of the burden of taxation, such suggested 
as benefit, equality, and ability. Each of these terms is 
capable of various interpretations which have changed from 
time to time. The benefit derived by any citizen from most 
of the public services evidently cannot be measured with 
exactness. The standard of equality cannot be applied in 
any literal sense to strong and weak, to rich and poor. It 
is possible, however, to interpret equality with reference not 
to objective goods, but to the psychic sacrifice occasioned by 
taxation. Ability thus is of many kinds and may be differ- 
ently understood. Some think ability to bear taxation is "in 
exact proportion to the money income"; others believe that 
it increases at a greater rate than money income, and favor, 
therefore, progressive taxation, that is, higher rates on the 
larger incomes. 

The conflicting interests of the classes in each period are 



478 



TAXATION IN ITS RELATION TO VALUE 



[CH. 49 



Social 
welfare 
as the aim 



Principles 
of admin- 
istration 



to some degree softened by the social conscience, and taxes 
are adjusted according to a vaguely held ideal of the social 
welfare. Social expediency, more or less broadly inter- 
preted, determines who shall be taxed and what will give 
the best social results. The exemptions from taxation in feu- 
dal times were great, and viewed from our standpoint were 
inequitable, for it was the upper classes who escaped while 
the peasants bore all the burdens. The landlords and no- 
bility who were assumed to be performing important social 
functions, often had outgrown their usefulness. Exemptions 
are granted liberally in most states to-day for some purposes 
and to some classes of citizens ; to educational, religious, and 
charitable institutions ; to the homes of priests and ministers ; 
to homesteads purchased with pension money, etc. Califor- 
nia alone of all the states in the Union continued until 1903 
to tax churches and private schools. The social interest 
requires that taxes be both elastic and productive, so that 
the needs of the government shall be amply provided for. 
The harmonizing of these needs in the laws of taxation re- 
quires a high degree of wisdom, of foresight, and of integ- 
rity, in the legislator and in the citizen. No hard-and-fast 
rule for the apportioning of taxes can be laid down. The 
decision must be made in each generation by social opinion, 
guided by the social conscience. 

2. The administration of taxation sJiould he economical, 
certain, and uniform. Whatever taxes are adopted, whether 
on property or income, whether at a proportional or a pro- 
gressive rate, their justice and expediency depend largely 
on their administration. Principle and practice in this as in 
most affairs may go far apart. Some laws are more easily 
and economically executed than others. The time of collec- 
tion should be as convenient as possible for the citizen, and 
the mode of payment should be the most simple. The ut- 
most certainty is desirable as to the time, method of payment, 
and amount. Taxation that is variable, shifting, dependent 
on personal whim and favoritism, is despotism. Above all. 



§ III] PRINCIPLES AND PRACTICE 479 

the administration of the law should be uniform and impar- 
tial, — vet this is a principle most frequently departed from 
in practice. The assessment of taxes has to be intrusted to 
men with 'fallible judgment, imperfect knowledge, and selfish 
interests. The assessor is as near a despot as any agent of 
popular government to-day. Not infrequently it is men in- 
capable of earning two dollars a day in any private business 
who are exercising this power of passing judgment on the 
value of millions of dollars' worth of property. Under the 
circumstances, evils are to be expected and they occur. The 
small property-owner often is crushed imder the unequal 
assessment while the large owner comes lightly off. Po- 
litical friends are favored, political foes are made to suffer. 
Woman nearly everywhere pays more than her fair share 
of taxes, a face that the advocates of woman suffrage do not 
fail to urge as an argument for their cause, although wo- 
men's disadvantage in this matter is little greater than that 
of any man without special political influence. 

3. The relation of taxation to private incomes makes it impor- 
one of the largest public questions of the day. The dis- taxation 
eussion of taxation has accompanied the growth of free gov- fsapub- 

^ <=> _ " lie ques- 

ernment in England and America from the time of ^Magna tiou 
Charta. The control of the public purse frequently was the 
occasion of conflict between the monarch and the people. 
Taxation was a leading issue in the American Revolution. 
While, therefore, it cannot be said that the subject has 
been of no great importance in the past, it is true that 
in our own national history since the adoption of the Con- 
stitution, taxation has not been much discussed, except 
in the one aspect of the tariff. Constitutional and political 
questions, states rights, and the question of slavery, long 
absorbed the interest of citizens and legislators. But with 
the aroused interest of the public in economic problems, 
taxation is attracting, and is certain to attract in the next 
few years, increasing attention in local, commonwealth, and 
national politics. 



CHAPTER 50 

THE GENERAL THEORY OF INTERNATIONAL 

TRADE 



The mo- 
tive of in- 
dividual 
gain in 
foreign 
trade 



§ I, INTERNATIONAL TRADE AS A CASE OF EXCHANGE 

1. International trade is exchange between individual 
men, and has the same object as other exchange of goods. 
The term international trade should not be misunderstood as 
meaning that nations rather than individuals engage in it. 
International trade differs from domestic trade only in the 
fact that the parties are citizens of different sovereign states. 
Exchanges between men in the same village, between those 
in neighboring villages, and between those in different coun- 
tries, are prompted by essentially the same economic motive 
— the wish to increase the want-gratifying power of goods. 
In every such ease both parties gain or think they are gain- 
ing. In international trade there is the same chance for mis- 
take as in domestic trade, but no more. In a single transac- 
tion in either domestic or foreign trade one party may be 
cheated, but the continuance of trade relations is dependent 
on continued benefits. The once generally accepted maxim 
that the gain of one in trade is the loss of another, is rarely 
applied now except to international trade. The starting 
point for the consideration of this subject is in this proposi- 
tion : Foreign trade is carried on by individuals, for indi- 
vidual gain, with the same motives and for the same benefits 
as are found in other trade. 

2. As commerce has grown, the territorial division of 

labor has correspondingly increased. Although economic 

480 



1 1] INTERXATIONAL TRADE AS A CASE OF EXCHANGE 481 

motives have had influence in political affairs and have Pouticai 
helped to determine political groupings and the limits of and trade 
modern nations, there is to-day no very close correspondence 
between political and economic boundary lines. Both in- 
dustrial and political conditions have changed so rapidly 
that the lines often have tended to diverge. It is common 
for two portions of a nation to exchange far less than do 
two portions of entirely different nations. 

The great territorial divisions of industry are determined Natural 
first and mainly by differences of climate, soil, and natural affecting 
resources. Thus trade arises easily between north and l°lf^^ 
south, between warm and frigid climes, between new coun- 
tries and old, between regions sparsely and regions densely 
populated. Foreign trade with distant lands is as old as 
history. In medieval times the luxuries of the temperate 
zone were mostly articles produced in the tropics. Political 
divisions usually have not been large enough to embrace 
widely varied soils and climates, the Roman Empire being 
an exception in marked contrast with the comparatively 
small political units of the Middle Ages. Before modern 
methods of transportation, a large free federal state like 
our republic was impossible. As in recent centuries the 
large political units have been formed, the question has 
arisen. Shall the political boundary be likewise the economic 
boundary marking the limits of trade? The firm constitu- 
tional Union of the American states arose out of difficulties 
with regard to trade. The German Zollverein, the fore- 
runner of the modern German Empire, had a similar 
origin. The Australian Federation consummated within 
the last few years has grown out of the need of adjust- 
ing tariffs and tariff boundaries. These larger political 
units containing such varied resources can in large meas- 
ure, if they will, discontinue trade with the rest of the 
world. 

Territorial division of trade is determined secondly by 
(liff'orences in the accumulation of wealth, in the development 

31 



482 GENERAL THEORY OF INTERNATIONAL TRADE [CH- 50 



Dlflfer- 
ences in 
culture 
and indus- 
try 



Compara- 
tive costs 
as between 
individual 
workers 



As be- 
tween com- 
munities 
differing 
in advan- 
tages 



of capital, of invention, and of organization, in the degree 
of intelligence of the workers, and in the grade of civiliza- 
tion. It is mainly trade due to this second group of causes, 
and carried on between old and new countries of about the 
same latitude, that is the subject of most discussion in eco- 
nomic treatises on international trade. 

3. The doctrine of comparative costs is that relative, 
not absolute, advantages of production determine for a coun- 
try the benefits of international trade. The free-trade ques- 
tion in any country is whether it is for its interest as a whole 
to permit trade between its citizens and the citizens of other 
countries. The question appears especially difficult where 
both countries have natural resources of about the same char- 
acter (as iron and coal in the case of England and America), 
and where, therefore, both can produce the things that are 
exchanged. If American labor can produce as much iron in 
a day as English labor, — or more, — is it not foolish and 
wasteful, it is asked, not to produce that wealth? Now, ex- 
actly the same case is presented in simple neighborhood ex- 
changes. The merchant may be able to keep his books better 
than does the bookkeeper whom he employs. The proprietor 
may be able to sweep out the store better than the cheap boy 
does it. The carpenter may be able to raise better vegetables 
than can the gardener from whom he purchases, and yet the 
merchant and the carpenter do not quit their better-paying 
work and turn to clerking or to raising vegetables. 

It often happens that both countries can technically pro- 
duce both the articles that are internationally exchanged. 
It may frequently happen that one of the two countries has 
an advantage in amount of sacrifice and effort, as to both 
articles, but if the advantage is greater in one article than 
in the other, the foreigners, like the low-paid clerk, will be 
willing to exchange at a ratio that will make it profitable to 
specialize in the product wherein the greater superiority 
lies. Therefore not the advantage as to a single product, 
enjoyed by one country over the other is most important 



§1] INTERNATION^y;. TRADE AS A CASE OF EXCHANGE 4,83 



in determining whether to produce at home or to exchange, 
but the comparative advantages enjoyed in the production 
of the two articles in question. 

It must be remembered that comparative cost as here 
used refers to cost in effort, not to money cost, — a point on 
wliich there is often confusion. The money cost of a certain 
product is often greater in a new country because wages are 
high, and wages are high just because psychic cost is low, 
that is, because labor can produce so much. At the time of 
the great gold discoveries in 1849-50, the price of goods in 
California was much higher than in the East, and much 
higher in Australia than in Europe. A day's labor doubtless 
would produce as much food in Australia and in California 
as in New England and in Norway, but it produced far 
more gold. Hence butter and cheese were shipped by long 
routes from Norway to Australia and from New England 
around Cape Horn to California, to be exchanged for gold. 
One of the standing arguments against foreign trade is based 
on the idea that a country cannot profitably import goods 
unless it is at an absolute disadvantage in their production. 
It is declared that as our country can produce these goods 
"as well" as foreign countries (meaning with as few days' 
labor), there is a loss on every unit imported. 

4. Tlie equation of international exchange is that adjust- 
ment of prices which results in the equalizing of the imports 
and exports of the country. The superiority of a new coun- 
try over an old one is not equally great in every line of 
industry. It is almost certainly most marked in those enter- 
prises where natural resources are employed. To compete 
with the older country in less favored industries, capital and 
labor in the new are forced to take a lower rate than they 
can earn in the more favored. Without any government 
supervision, therefore, but simply through the choice of 
enterprisers seeking the best investment of capital, industries 
are developed in which the country is either most markedly 
superior or least inferior to its neighbors. 



Examples 
of com- 
parative 
costs 



Selection 
of the 
most pay- 
ing indus- 
tries 



484 GENERAL THEORY OF INTERNATIONAL TRADE [CH. 50 



Persist- 
ence of 
the differ- 
ences 



The ratio 
of inter- 
aational 
demand 
defined 



If the productive energies of men interchanged between 
industries and between countries with perfect readiness, a 
perfect equilibrium of advantage would everywhere result. 
In every country, in every occupation, labor and capital of 
given quality and amount would receive the same reward. 
But the interchange of labor and capital between countries 
is never without friction, Adam Smith said that "a man is 
of all sorts of luggage the most difficult to be transported. ' ' 
The higher wages in a new country are sufficient to attract 
constantly fromi the older lands a portion of their labor 
supply; the higher rate of interest in the new countries at- 
tracts constant additions of capital ; yet, despite these forces 
working toward equalization, the inequality may remain and 
through the working of other influences even increase in the 
course of years. 

The laborers, enterprisers, and investors in the one coun- 
try are thus in a position of more or less enduring advantage 
relative to those of the other countries. The advantage is 
sometimes said to be a "monopoly" which they, or the coun- 
try as a whole, enjoy ; but in the absence of any contractual 
limiting of competition, this is a misuse of the term monop- 
oly. This variation in the degree of scarcity of agents in 
different territories is not peculiar to nations as a whole. 
Differences of the same nature exist between the Northern 
and the Southern states of the American Union, have con- 
tinued for decades between Eastern and Western states, and 
are found even between neighboring counties. The differ- 
ences between two countries, however, are likely to be more 
marked, the circulation of factors being so active within a 
country that it is allowable to speak broadly of prevailing 
national rates of wages and of interest. 

Every exchange of goods between the countries is made 
at a ratio that reflects, or expresses, this abiding difference in 
comparative costs. The imports into the favored country 
represent regularly the results of more units of labor of a 
given grade than do the corresponding exports. The ratio 



§ II] THEORY OF FOREIGN EXCHANGES OF MONEY 485 

which expresses the disparity of advantage of productive 
factors is called "the equation of international demand." 
This does not mean that the total money valuation of the 
imports exceeds that of the exports, or vice versa. On the 
contrary, the equation itself embodies a maxim of interna- 
tional trade that "in the long run," or "on the average," 
imports and exports must be equal in value {i.e., equation of 
demand). This brings us to the theory of foreign exchanges, 
which is essential to an understanding of this feature of in- 
ternational trade. 

§ II. THEORY OF FOREIGN EXCHANGES OF MONEY 

1. Foreign exchange of money is the purchase and sale purpose 
of the right to receive a given kind and weight of metal at a exchange 
specified time and place. Par of exchange is the number of 
units of the standard coin of one country that contain the 
same amount of fine gold (or silver) as the standard coin of 
the other country. Usually the English pound is taken as 
the basis in the tables which express the ratio of the gold in 
the standard coins of different countries. The gold shipping 
point is par of exchange plus or minus the cost of moving 
the actual metal ; it varies with means of transportation and 
communication. The par of exchange between England and The rate 
America being $4,866 and the cost of expressing and in- exchang" 
suring a gold pound between New York and London being 
approximately .03, the shipping point for the export of gold 
from New York is $4,896. At the upper and lower limits, 
there is a motive for shipping gold as a commodity. If each 
transaction were independent of all others, the cost of ex- 
change would be the weight of metal called for, plus grains 
enough more to pay for loss of interest, cost of freight, 
risk, and trouble. In such a case it would cost $4,896 
to remit one pound ; while a debt of one pound payable in 
London would at the same time be worth $4,836 to the credi- 
tor in New York. When, in New York, a number of men hav- 



486 GENERAL THEORY OF INTERNATIONAL TRADE [CH. 50 



Variation 
about par 
of ex- 
change 



The cash 
balance of 
interna- 
tional 
trade 



ing bills to pay in London meet a number of owners of bills 
receivable in London, a market for London drafts is created 
and a rate of exchange results somewhat between the ship- 
ping points. In this is the explanation of the variation of 
the rate, and of the facts that the cost of outward exchange 
sometimes may be less than the par of exchange or that the 
value of foreign drafts sometimes is above par. 

The balancing of foreign exchanges is of essentially the 
same nature as the domestic cancellation of indebtedness. It 
IS going on constantly between two merchants in the same 
town, between two banks in the same town who represent 
groups of merchants, between men in neighboring towns, 
between distant states like New York and California, and 
between the trading nations of the world. The price of ex- 
change to the individual is reduced by the specializing of 
the business in the hands of a few dealers, permitting 
cancellation of indebtedness or offsetting of exchange, and 
greatly reducing the amount of bullion to be transported. 
Exchange varies above and below par as conditions change. 
When the movement of money is into the country, drafts on 
London are bought and sold for less than par, for every 
pound draft thus remitted to London reduces the need of 
shipping gold to this country, while every draft from Lon- 
don on New York collected at such times increases the need 
to ship gold. 

2. International shipment of money is always just the 
amount needed to halance the accounts due. The proposition 
that in the long run the value of imports must equal the 
value of exports, while the fundamental truth in the theory 
of international trade, must be understood in a broad sense. 
Into the balance between the traders of two nations enter 
many items : the cash values of the imports and exports 
of each ; freights, insurance premiums, and commissions ; 
the expense of Americans traveling in foreign lands, and 
the cost of the foreign service of this government (such 
as the salaries of consuls and of diplomatic representatives) 



I II] THEORY OF FOREIGN EXCHANGES OF MONEY 487 

%vhich count as the importation to America of an equivalent 
amount of food, clothing, and sundry services ; subsidies and 
war indemnities to foreign nations representing, as they do, 
an expenditure, which at the moment may be paid in coin, 
but which, as is to be more fully explained, must be offset 
ultimately in some way by exports. 

Many credit transactions affect the balance one way or various 
another until settled. The loans made by European capital "ems'en- 
to the American government or to individuals and corpora- teringinto 

° . the bal- 

tions in America, as well as the European capital expended ance 
in purchasing American enterprises, require the remitting 
of gold to New York, and thus offset many imports of goods 
to New York otherwise calling for the remitting of gold to 
London. In the direction opposite to this, act the interest 
payments and the eventual repayment of the principal loan, 
for these require either money or goods to be exported from 
America to the value of the obligations. Loans that run for 
years thus offset annually (in their accruing interest) a 
portion of the exports of the debtor country. An excess of 
exports may therefore at any given moment indicate either 
that the country is in debt or that it is getting out of debt. 
An excess of exports is generally looked upon as a sign of na- 
tional prosperity; but it is quite inconclusive evidence on 
the point. Finally, after all the items of imports and credit 
paper purchased abroad are set opposite the items of exports 
and promissory papers sold abroad, the balance is paid in 
gold bullion and is shipped one way or the other. Evidently 
the amount of gold shipped is but a small fraction of the 
total volume of transactions. 

Industrial indebtedness is represented in various forms: 
bills of lading for goods shipped, drafts made by the creditor 
on his debtor for goods shipped or property sold, checks or 
letters of credit of travelers, bonds and notes x'>ublic and 
private. These are the objects dealt in by the bankers who 
are the agents to carry on the work of exchange. 

3. The territorial distribution of money is both a deter- 



488 GENERAL THEORY OF INTERNATIONAL TRADE [CH. 50 

Relations mined and a determining factor in international trade. It 
ternaVonai ^ppears to be determined in that the balance of all accounts 
flowof fQj. or against the country must be settled eventually in 
the flow of money. After any such a settlement one country has less, 
^°^^^ the other more money than before. The change in the amount 
of money at once reacts on prices and becomes a determining 
factor in international trade. The flow of money out of a 
country causes money to tighten, interest rates on short 
loans in the large cities to stiffen, and prices slightly to fall. 
When prices fall, imports decline, as the country is not so 
good a place to sell in ; when prices rise, imports increase, as 
it is a better place to sell in. As the opposite effect is pro- 
duced on exports, there occurs immediately a change in the 
quantity of money which continues until the national credits 
and debits balance and for a brief time remain in equilib- 
rium. If the trade of a country with its neighbors continued 
long to give a balance of imports of goods and of debit items 
(exclusive of money) it would ultimately be drained of all 
its coin, and would default payment or cease to import. If 
the trade constantly gave a balance of exports and credit 
items, money would continue to flow in, until prices rose to 
unexampled heights. In fact no such extreme is even re- 
motely approached, for a slight movement of money in either 
direction at once influences prices and sets in motion counter- 
acting forces. Decade after decade the circulating medium 
of leading countries changes only slightly in amount, and the 
fluctuations during periods of so-called "favorable balance 
of trade" and of "unfavorable balance of trade" represent 
only the smallest fraction of the value of goods passing 
through the ports of the country. 

§ III. REAL BENEFITS OP FOREIGN TRADE 

1. The direct advantages of foreign trade consist in the 
increased efficiency it imparts to productive forces. In ex- 
planation of the advantages of foreign trade it is said to be 



§111] REAL BENEFITS OF FOREIGN TRADE 489 

a vent for surplus production and to give a wider market Fallacious 
to what would otherwise go to waste. This involves the ti^ns'of 
same fallacy as the "lump of labor," the destruction of ^^^^''^^l 
machinery, and the praise of luxury. If backward nations eign trade 
now give a vent for products which would otherwise rot in 
the warehouse, at length a time will come when the world 
will have an enormous surplus unless neighboring planets 
can be successively annexed. Again it is said that the great 
purpose of foreign trade is to keep exports in excess of 
imports so that money may constantly increase in amount. 
The ideal of such theorists is an impossible condition where 
the country would constantly sell and never buy. In the 
commercial view the sole object of foreign trade is to afford 
a profit to the merchants, regardless of the welfare of the 
mass of the citizens. 

The main advantage of foreign trade is the same as that The real 
of any other exchange. It is hardly necessary to review the tagesof 
explanation here: the increased efficiency of labor when it l°l^^^ 
is applied in the way for which each country is best fitted ; 
the liberation of pro'ductive forces for the best uses; the 
development of special branches of industry with increasing 
returns; the larger scale production with resulting greater 
use of machinery and with increased chance of invention ; 
the destruction of local monopolies. 

The moral and intellectual gains of foreign commerce 
were formerly much emphasized. Commerce is an agent of 
progress ; it stimulates the arts and sciences ; it creates bonds 
of common interest; it gives an understanding of foreign 
peoples and an appreciation of their merits ; it raises a com- 
mercial and moral barrier to war; and it furthers the ideal 
of a world federation, the brotherhood of man. 

2. Free foreign trade thus has in its favor the presump- conflict 
tion of advantage to the citizens; hut various interests may genlraf 
he adversely affected. The general attitude of economic ^"^^resu^*^ 
students for a century and a half has been favorable to a 
large measure of freedom in foreign trade. But the actual 



490 GENERAL THEORY OF INTERNATIONAL TRADE [CH. 50 

practice of nations is opposed to the principles laid down 
by the philosophers and accepted by nearly all serious stu- 
dents of the question. Germany adopted very restrictive 
PreTaience Hicasures undcr Bismarck in 1879 and by recent laws has 
ive^urfffs' discouragcd trade still further. France, Italy, and other 
smaller nations of Europe have strong protective tariffs. 
The United States has followed a restrictive policy for the 
last century almost unvaryingly. The explanation of this 
contradiction is not entirely simple. Great interests are af- 
fected by foreign trade and certain of these interests are 
able to dominate legislation. Free trade is not the most 
desirable thing for every one. The general proposition of 
free trade between nations, as advocated by most economists 
since Adam Smith, is rejected by a majority of the people, 
by the politicians, and by the legislators. 

3. The following statistics of the foreign commerce (mer- 
chandise imports and exports) of the principal countries of 
the world are given in significant groupings which call 
for various explanations. Figures are in million dollars 
($1,000,000) and are mostly for the year 1908. (Stat. Abst. 
1908, p. 769.) 



COUNTRIES HAVING EXCESS 



OF IMPORTS. 



OF EXPORTS. 



United Kingdom 

Germany 

Netherlands 

France 

Belgium 

Italy 

Austria-Hungary 
Switzerland . . . 

Spain 

Sweden 

Denmark 

Norway 

Canada 

China 

Turkey 



Im- 


Ex- 


ports. 


ports. 


3,886 


1,835 


1,824 


1,523 


1,130 


873 


1,089 


975 


642 


484 


562 


334 


487 


457 


287 


200 


168 


153 


163 


129 


191 


165 


101 


64 


298 


' 222 


254 


178 


135 


85 



Im- 
ports. 



United States . 
Russia 

Australasia . . . 
British Colonies 
British India . . , 

Japan 

Mexico 

Cuba 

San Domingo . . 

Argentina 

Bolivia 

Brazil 

Chile 

Uruguay 

Venezuela .... 



1,312 
436 



242 

558 

418 

196 

78 

84 

5 



263 
21 

172 
98 
35 
10 



Ex- 
ports. 



1,638 
542 



302 
615 
486 
206 
115 
116 
10 



353 

24 

214 

116 

37 

15 



Nature of 
a tariff for 
revenue 



CHAPTER 51 
THE PROTECTIVE TARIFF 

§ I. THE NATURE AND CLAIMS OF PROTECTION 

1. A protective tariff is a schedule of import duties so 
arranged as to give appreciahly more favorable conditions 
to some domestic industries tJian they would enjoy with free 
trade. Tariff duties were first laid to get revenues for the 
government. The first effect of the tariff' is the same as that 
of any tax that enters as a new factor into enterpriser's 
cost — the domestic price of the taxed article tends to rise. 
Other results then follow. If the article cannot be produced 
within the country (as oranges, spices, and coffee, in Eng- 
land, Norway, and Sweden), its consumption is reduced. 
The lessening of demand may affect somewhat the price in 
the producing country and may compel the foreign producers 
to sell each unit for less than before. As such a tariff does 
not increase home production, it is for revenue, not for 
protection. 

But if the article can be produced in the importing country 
at the new price, "home industries" will start. If the whole upon home 

industry 

demand at home is thus supplied, imports stop and there- 
with stop all revenues to the government from that source. 
This is a prohibitive or completely protective tariff'. Most 
tariffs combine the characters both of revenue and protective 
measures. Where the freight charges are low along the 
coast and on main lines of transportation, some imports 

take place ; wliile farther inland, where freight charges are 

491 



Effects 



492 



THE PROTECTIVE TARIFF 



[CH. 51 



The begin- 
ning of 
the tariff 
under the 
Constitu- 
tion 



The tariff 
contro- 
versy be- 
fore 1865 



high, some home production of the same goods takes place. 
A tariff that reduces imports but does not cut them off 
entirely is either a revenue tariff with incidental protection 
or a protective tariff with incidental revenue. The differ- 
ence is partly one of legislative intention, partly one of de- 
gree only. 

2. The tariff question has been the most discussed of 
economic questions in American politics. The tariff bill 
passed by the first session of Congress in 1789 was primarily 
a revenue measure with rates averaging only about five per 
cent.; but incidentally it was protective (as most tariffs 
are), being laid on imports of iron and cloth, the production 
of which had been undertaken to some extent before, but 
which thus were further encouraged. Between 1808 and 
1812, the United States and England were in constant dis- 
agreement, and our government repeatedly laid an embargo 
on British commerce, closing our ports to British ships, and 
British ports to our ships. The war from 1812 to 1815 
almost annihilated American trade on the ocean. To these 
discouragements of foreign trade was added a high tariff, 
imposed in the vain effort to get revenue from greatly de- 
creased imports. Altogether these causes almost completely 
stopped importation and this stimulated some industries 
in a high degree. When in 1816, their destruction was 
threatened by the repeal of the high war tariffs, and many 
investments and interests were at stake, the tariff became a 
most important question. 

The first period of real discussion of the protective policy 
was between 1816 and 1846. The result of the first twelve 
years was an increase of the tariff rates which, in 1828, 
reached a high point. By the compromise of 1832, the rates 
were reduced by steps till 1841. Again from 1842 to 1846 
was a brief period of higher duties, followed by a policy 
which, relatively speaking, was one for revenue, from 1846 
to 1860. Again in the Civil War, 1861-65, the rates were 
steadily increased without much discussion, the tariff not 



discussion 
of the 



§ I] THE NATURE AND CLAIMS OF PROTECTION 493 

being the leading question at a time when the prosecution 
of the war was absorbing nearly all attention. 

Another period of discussion was from 1874 to 1892. In Recent 
the Tilden and Hayes campaign of 1876 the tariff was made 
the leading issue and the advocates of a lower tarift* were ^^^^^ 
very nearly successful. In 1880, protection again triumphed 
in the election of Garfield. In the election of Cleveland in 
1884, the issue of tariff reform had some part, but no effec- 
tive legislation on the subject was enacted in the next four 
years. In 1888, Cleveland was defeated in a campaign 
fought mainly on the tariff issue, and Harrison was elected 
as a pronounced protectionist. In 1892 the tariff was again 
the dominant issue and Cleveland being reelected on the 
issue of tariff reform, the Wilson bill with some lower duties 
was passed in 1894, only to be replaced by the Dingley pro- 
tective tariff of 1897. Then came a lull in the discussion of 
the tariff question and until 1908, the money question, im- 
perialism, and trusts quite crowded the tariff issue off the 
stage. 

3. A leading argument in favor of a protective tariff is The 
that hy encouraging an excess of exports it maintains a o^r^rde" 
favorable balance of trade. This notion of the favorable argument 
balance of trade appears in several forms. One of these, 
already discussed in connection with foreign exchanges, is 
that the exports of a country in the form of merchandise 
must exceed the imports if the country is to prosper. The 
ideal cherished is to keep more merchandise constantly flow- 
ing out of the country than comes in. An interesting com- 
mentary on this delusion is the fact that this is the usual 
situation in poor debtor countries having constant interest 
payments to meet ; while the opposite of the ideal is the sit- 
uation in rich creditor countries. England for many years 
in the period of her greatest prosperity has had a constant 
excess of imports, these being goods to the value of the in- 
terest payments due to Englishmen from investments abroad. 

4. A)iother argument is that the protective tariff Icceps 



494 THE TROTECTIVE TARIFF [CH. 51 

"To keep money at home tvhich, if trade is free, will he sent abroad to 
hcnne'^'^ ^^V foreign goods, thus impoverishing the country. This 
is the "favorable balance of trade" argument, with the em- 
phasis on money rather than on goods. A superficial glance 
at the trade relations of an old, rich country with a new 
province seems to give evidence for such a belief. The older 
country which is lending capital (sent to the debtor country 
in the form of goods) has at the same time a larger supply 
of money. The lack of money and the poverty of the newer 
country are looked upon by the protectionist as due to the 
importation of goods. The real cause of the imports to the 
newer country and of its scanty money-supply, it need hardly 
be said, is its comparative poverty. Europe and the United 
States, in their trade with China and South America, do 
not get gold in exchange, but merchandise of various sorts. 
It is true that in the trade of England and New York with 
great gold-producing districts, such as California, South 
Africa, and Alaska, gold is received in return for merchan- 
dise, for to these districts gold is merchandise and its ex- 
port does not drain them of their supply. The richer states 
in the Union do not drain the poorer states of money. A 
few years ago the states of Kansas, Nebraska, Iowa, and their 
neighbors were filled with resentment against the money- 
lenders of the Eastern states. There was a widespread be- 
lief that hard times were due to an insufficient currency. 
Attempted action took the form of the greenback and free- 
silver movements, which were defeated by the opposition of 
the East, but there can be little doubt that if the Federal 
Constitution had not forbidden it, the discontented states 
would have established a protective tariff "to keep their 
money at home." Few advocates of protective tariffs are 
ready to admit that the money-supply of the country is de- 
pendent on the general wealth of the country, and on the 
methods of doing business, rather than on a protective 
tariff. 

5. It is said that the tariff keeps "two profits" at home, 



§1] THE NATURE AND CLAIMS OF PROTECTION 495 

foreign trade gives hut one. The word "profits" is here The "two 
used in the popular sense of gain from a single transaction, argument 
This argument becomes somewhat confused, for certainly in 
the admission that there are "two profits" in a trade, the 
notion that "one man's gain is another's loss" is rejected. 
Both parties are said to profit and both profits are thought 
to be secured at home when two citizens are forced to trade 
with each other. There is an error in elementary arithmetic 
here, both as to the number and as to the aggregate amount 
of profits. The purpose of a protective tariff is to compel 
two of the citizens of a country to trade with each other 
instead of trading with tivo citizens of a foreign state; the 
number of profits is therefore not increased by substituting 
domestic for foreign trade. What, then, as to the size and 
aggregate amount of the profits ? The margin of advantage 
is not the same on all exchanges ; the exchange is made if 
there is a margin to both parties, no matter how small it is ; 
but the generous "profit" on one transaction where the 
conditions of the two parties are very different may be 
greater than the total of petty margins on a dozen exchanges 
between two traders of evenly matched powers. Can it 
safely be assumed that every trade with a foreigner is less 
advantageous than one with a fellow-citizen ? Diamond cuts 
diamond, but two shrewd Yankees left to themselves surely 
should not be worsted in bargains with the universe. If 
they could exchange to better advantage with each other 
they probably would discover it as soon as the interested 
manufacturers and political orators who can prove so elo- 
quently that they know the other man's business better than 
he knows it himself. Forcing the home trade is doubtless 
to the advantage of one citizen, but it is not likely to be to 
the advantage of both citizens. 

6. The most effective popular argument for protection The claim 
is that it raises, or maintains, the general scale of wages in tection° 
the country. This argument is two-fold : first, wlien wages raises 
are low in a country it is claimed that a tariff is needed to 



49G 



THE PROTECTIVE TARIFF 



[CH. 51 



raise them ; and, secondly, when wages are high it is argued 
that a tariff alone can preserve them. In Germany the fear 
is of the higher paid and more efficient labor of England. 
In America, where wages at all times have been higher than 
in England, it was first argued that because of the greater 
cost of production, due to high wages, the tariff was needed 
to start certain industries; but after the tariff had long been 
established and the old argument had been forgotten, it was 
said that the tariff was the cause of the high wages and 
must be maintained to protect against the (so-called) 
"pauper" labor of the older countries. That wages gen- 
erally are higher in new countries and where a tariff prevails 
is always claimed to be one of the chief fruits of a protective 
policy. The cause of the high wages in America appears to 
be the greater efficiency of industry under existing condi- 
tions. Labor is surrounded here with advantages in the 
forms of rich natural resources and of mechanical appliances 
such as never before were combined. Because of the scarcity 
of workers in particular protected industries, wages may be 
higher in them than in some other industries; but such 
workers form a small fraction of the population. The claim 
that the general scale of wages in all occupations is raised 
by the tariff protecting this fraction, is no less invalid than 
the sweejDing claims in favor of trade-unions. 

§ II. THE REASONABLE MEASURE OP JUSTIFICATION OF 

PROTECTION 



Political 
arguments 
for pro- 
tection 



1. For military and 'political reasons an otherwise un- 
economic tariff may he justified. It usually is admitted by 
the believers in free trade that in the interest of diplomacy, 
to secure proper concessions, tariffs may sometimes be lev- 
ied. Even in England, where protective arguments long 
have had little acceptance, Mr. Chamberlain, with his eye on 
a tariff union and imperial federation of Britain and her 
colonies, has been advocating this policy. In such a ease 



§ II] THE MEASURE OF ITS JUSTIFICATION 497 

there is no pretense that the justification of the tariff is 
its immediate economic advantage ; it is an expenditure 
for ultimate gain. By the same argument a protective 
tariff is upheld as a means of defense — to encourage the 
building of ships, arsenals, and factories for munitions. It 
is always questionable whether an outright expenditure 
would not be better, whether the government cannot build 
its own arsenals, ship-yards, etc., more cheaply than it can 
foster private enterprise by means of a tariff. 

2. Protection may he defended as encouraging infant in- r'h^ in- 
dustries and thus diversifying the industries of the country, tryargu- 
Most free-trade writers concede a limited validity to this '^®°*' 
argument. If the natural resources of a land are adapted 
to an industry, it may early be called into being by a 
fostering protective tariff". This is merely anticipating and 
hastening the natural order of progress. In the American 
colonies the manufactures of iron, cloth, hats, ships, and 
furniture sprang up not only without "protection," but 
despite numerous harassing trade restrictions made in the 
interest of the English merchants ; and these manufactures 
continued despite the adverse laws. Can it be doubted that 
many of these industries would have developed and flour- 
ished in America under no other fostering influences than Applied to 
those of rich resources and of economy in freights? The 
growth of industries in the Middle West in the last twenty- 
five years has been phenomenal. The discovery of natural 
gas and the presence of abundant coal, ore, and timber have 
enabled them to develop without protection against the East- 
ern states. Industries capable of eventual self-support must 
in most cases naturally appear in due time. Economic 
forces will bring them out. It is a trite but valid remark 
that protective system is often like a hothouse, anticipating; 
the season by a few weeks and at great cost. The question 
is whether the mere possession of the hothouse is a luxury 
worth the price, if meantime the products can be got more 
cheaply by exchange. English manufactures flourished in the 



America 



32 



498 



THE PROTECTIVE TARIFF 



[CH. 51 



Social ef- 
fects of 
the tariff 



TTie 
"home- 
market" 
argument 
as to 
freights 



nineteenth century because they were well established, had 
excellent coal supplies, great stores of iron ore, and low- 
paid labor which did not have the opportunity of better 
alternatives, as did the American workman. If America 
had imported more (it would not have been all) of her 
iron and coal, the English mines would have been exhausted 
earlier, and America's advantage surely would have asserted 
itself in time. Her iron manufactures undoubtedly were 
hastened — they cannot truly be said to have been created — 
by the protective tariff. 

Industries are forced into an earlier diversification by 
tariffs. The peculiar advantages of a new country attract 
labor and enterprise into a few lines. Is it an evil? Con- 
trast Iowa, Dakota, and Minnesota, or Kansas, if you please, 
with New York and Pennsylvania. Is it so certain that a 
dense population congested in cities and crowded in factories 
and mines is a more ideal social aggregation than is a com- 
munity of prosperous farmers? The smoky industrialism 
fostered by protection often puts a premium on a low grade 
of immigrant and keeps him an alien to the American 
spirit. It would be surprising if Americanism on theWestern 
plains were not as good as in the Eastern cities. But the 
infant-industry argument appeals strongly to the enterprise 
and the speculative spirit of Americans, who like to do all 
things rapidly and on a large scale. Every village aspires 
to be a great industrial center. Americans are impatient 
of the suggestion that things "will come in time"; they like 
things to come at once. 

3. The tariff develops a home market for the products 
of agriculture. It has been esfpecially hard to reconcile the 
farmers in America to the tariff. While in England the 
protection that existed before 1846 was almost entirely for 
the benefit of the landholding interests, the tariff in America 
has been peculiarly favorable to the manufacturers. The 
"home-market" argument is the protectionist appeal that 
has proved most effective with the American farmers. This 



§ II] THE arEASURE OF ITS JUSTIFICATION 490 

argument, which takes on several aspects, is akin to the 
"two-profits" argument when it declares that the shipping of 
food to Europe and the importing of mannfactiires involve 
a great cost for freight which could be saved by manufac- 
turing *'at home." Of course the farmer is supposed to pay 
this cost, although there is nothing in the argument to show 
that it is not all paid by the European, either the manu- 
facturer or the food consumer. Home trade "saves the 
freights" for the farmer only in case he can buy goods un- 
der a tariff with less of his own labor and products than un- 
der free trade. The payment of freight charges is true econ- 
omy when the goods can be bought at a distance on more 
favorable terms than near home. The freight-argument 
proves too much, for it condemns every exchange, within the 
country, of goods produced a stone's throw away from the 
consumer. 

Again, the home-market argument dwells on the greater Astose- 
steadiness of domestic trade. War or political changes, it lSl° 
is said, may change the demand for products. This is true, 
but no other changes have affected American agriculture 
so radically as the peaceful development of domestic trans- 
portation and the opening of the West. 

The home-market argument is strongest when addressed, Astotne 
not to all farmers, but to one class of farmers, those whose farm.ia^ds 
lands are situated nearer the manufacturing cities. The 
higher value taken on by land as it is converted from the 
extensive cultivation of corn and wheat to dairying, fruit, 
and market-gardening, is pointed to as a benefit of pro- 
tection. The decaying agriculture and deserted farms 
throughout the great industrial states from 1870 to 1900 
were pathetic evidences that this benefit failed to come to 
the average farmer just where it should be most expected. 
There is, however, a partial validity in the argument as ap- 
plied to a comparatively small number of farmers, who gain 
as landlords, not as tillers of the soil. 

4. The tariff may keep some of the natural resources of 



500 



THE PROTECTIVE TARIFF 



[CH. 51 



Exports 
and ex- 
haustion of 
the soil 



Protection 
as a 

monopoly 
measure 



a new country from becoming quickly exhausted. The ex- 
port of food takes out of the soil and out of the country 
fertile qualities never to be returned. The shipment of 
several hundred million dollars of food products year after 
year represents a tremendous drain from the soil of the 
United States. The assumption, however, that the use of the 
food in this country would preserve the fertility of our own 
fields has been in the main mistaken. The fertile material 
in the food shipped for human consumption five miles away 
from the field is almost absolutely lost. Engineering skill 
has as yet succeeded in saving hardly a fraction of the fertile 
organic matter that flows into the sewers, that is dumped into 
river and ocean, and that is buried in heaps at the borders of 
our cities. On the other hand, the increased use of iron, coal, 
and timber, as a result of encouraging manufactures, has 
very effectually hastened the exhaustion of the natural re- 
sources of the country. 

5. A new country has a limited potential mor.opoly in cer- 
tain kinds of products; a tariff may make it effective. The 
opening up of a new country with rich natural resources may 
be a great gain to the average consumer in the older coun- 
tries, although it causes a loss to a special class of land- 
owners. "Whether the citizens of the older or of the newer 
country shall reap the greater benefit in the trade depends on 
the reciprocal demand for the two classes of goods, as was 
seen in discussing the equation of international demand. A 
wide margin of advantage may go to one party and a narrow 
margin to the citizen of the more favored land. To put it 
concretely: if America, having great natural resources for 
agriculture, continues to exchange food for manufactures up 
to the narrowest margin of advantage, England reaps most 
of the benefits of the trade. An American tariff on manufac- 
tures from England will, under such conditions, check the 
demand for English products and compel some Americans 
to leave farming. This reduction of the American supply 
of wheat or corn and of the American demand for English 



§ III] VALUES AS AFFECTED BY PROTECTION 501 

manufactures compels a new ratio of exchange. It is con- 
ceivable that exchanging fewer goods at a larger margin of 
advantage, will give a larger total of gain to the favored 
nation. Thus, by the shifting of the ratio of exchange, 
foreigners may be compelled to pay a part of the tariff to 
enjoy the favored market. This is but a special case of the 
monopoly principle; the government by law artificially lim- 
its the supply of goods offered by its citizens. 

This argument is somewhat subtle, but probably is the Limited 
soundest one in the theory of protection. The supposed ^dvTif-"^^ 
conditions seldom occur, but they may exist, and probably ^g^jca 
have existed in America. When the great system of internal 
transportation was developed in the United States before 
that of the other new countries, this country had such pe- 
culiar advantages for the production of food that the quan- 
tity was enormously increased and the prices fell. At such 
a time the tariff may work toward retarding the unfavorable 
turn in the ratio of exchange and toward reestablishing early 
a more favorable ratio. But the limited application of the 
principle must be recognized. The potential competition of 
undeveloped countries on all sides, seeking to develop their 
resources, to raise their own food, and to profit by the higher 
prices in the world-market caused by the tariff, threaten the 
peculiar advantages of the favored land. A great nation 
with its manifold interests is not eminently fitted to practice 
the gentle art of monoply. 

§ III. VALUES AS AFFECTED BY PROTECTION 

1. An increase of the tariff is favorable to many capital- influence 
ists and to mamj owners of nalural resources. A denial of "aili^of 
large general advantages in protection is not the denial of capital 
all its influence on value. On the contrary, it cannot be too 
strongly emphasized that in manifold ways property valu- 
ations are affected by the tariff. Owners of natural mineral 
resources are among the first to benefit. When the price of 



502 THE PROTECTIVE TARIFF [CH. 51 

iron is low, many iron- and coal-mines may yield no present 
rents and have a small capitalization. A tariff forcing home 
production opens the marginal resources and gives them a 
large capitalization. Factory sites and surrounding lands 
leap from the level of rural prices to that of city real estate. 
The owners of farms situated near the new industries have 
a home market and get scarcity prices, as they alone can 
supply the needed fresh vegetables and dairy products. 
Wealth less favorably situated, however, is in many cases 
depressed in price because its products exchange for smaller 
amounts of other products. 
Thespe- 2. A tariff is immediately favorahle to som.e enterprises 

"nd the^^ <*^*tZ to Special classes of workmen. Enterprisers already ae- 
burden quainted with and engaged in a business always may hope 
to gain by the higher prices immediately following a rise 
in the tariff rates on their particular products. Though they 
are granted no enduring monopoly by the protection, they 
for the time enjoy the advantage of being on the ground and 
reap the first fruits of the favoring conditions. The enter- 
priser usually profits when the price of his product suddenly 
rises. Usually skilled workmen are affected slowly by com- 
petition when there is any considerable increase of their 
special industry. The burden of higher prices is very soon 
distributed to a number of less favored citizens. A part of 
it may be borne by the retail merchant, a part by his cus- 
tomers. The weight falling on each is usually small, often 
unsuspected, always hard to measure. The increased benefit 
is concentrated in a few industries and accrues to a com- 
paratively few producers. Here is a recipe for riches: get 
everybody to give you a penny; they'll not miss it, and it 
will mean a great deal to you. Something like this happens 
in the case of many protected industries ; every consumer of 
the article pays a penny more, a few wage-earners gain, and 
a few enterprisers wax wealthy. 

3. A sudden reduction of the tariff causes local crises 
and may hring on a general crisis. The repeal of the tariff 



§111] 



VALUES AS AFFECTED BY PROTECTION 



503 



policies in 

political 

discussion 



•works in a direction the reverse of its enactment. The ben- sudden 
efits of the lower prices are diffused ; the immediate injury is du"tio'n" 
concentrated and acute. Factories are closed, capital is de- »°J""o"s 
predated, labor is thrown out of employment. The organic 
nature of local industry causes the evil to be felt by many 
classes. Merchants, professional men, servants, and skilled 
laborers that are tributary to the depressed industry, suffer. 
The effects are transmitted to commercial and financial cen- 
ters and credit is shaken. The readjustment of industry is 
slow and much capital is lost in the process. 

It is rarely appreciated how great is the tactical advantage The two 
enjoyed in political contests by the advocates of a high tariff. 
They can so easily impress the popular judgment with the 
evident fruits of their own policy, and with the immediate 
dangers of the policy of their opponents. The low-tariff 
advocates in America undoubtedly have made the mistake 
of underestimating or of quite overlooking these immediate 
effects. They have been too abstractly doctrinaire, and have 
argued too absolutely for the merits of free trade. They 
have opposed one extreme system by another, with no 
thought of the inexpediency and injustice of sweeping 
changes. There is a strong feeling among business men that 
any tariff, be it high or low, is better than a shifting policy. 
Despite the great preponderance of domestic production over 
foreign trade, it is perhaps too much to say that the tariff 
is unimportant in our present conditions. It can, however, 
be said that the tariff agitation has taught that radical 
changes, especially sudden and large reductions, are fraught 
with evils, and that business can adjust itself in large mea- 
sure to any settled conditions. With the widening of our 
international relations are growing interests favorable to 
reciprocity or to other freer trade relations, and, for vari- 
ous reasons public sentiment has, since the turn of the twen- 
tieth century, been developing in this direction. 



CHAPTER 52 

OTHER PROTECTIVE SOCIAL AND LABOR 
LEGISLATION 



City 
growth 
and new 
social 
problems 



Need of 

social 

regulation 



§ I. SOC